Charles O'Reilly, Stanford Graduate School of Business professor and a leading expert on innovation and organizational change, joins Beyond the Prompt to explore why successful companies so often struggle to adapt. As AI accelerates change across every industry, Charles explains why the challenge isn't coming up with new ideas. It's building organizations that can keep exploring what's next while continuing to execute what's already working.
Most companies know how to innovate. Far fewer know how to scale innovation.
Charles introduces the explore versus exploit framework, explaining why the same systems that help organizations succeed today can make them resistant to change tomorrow. As companies mature, they become better at serving existing customers, improving existing products, and optimizing existing processes. The harder question is how to create space for experimentation without undermining the business that already exists.
Henrik, Jeremy, and Charles explore what this means in the age of AI. They discuss whether AI should be viewed as a substitute or a complement, why Microsoft's transformation under Satya Nadella succeeded, how Amazon has built exploration into its operating system, and why leaders don't create adaptable organizations through vision alone. They do it by shaping culture through incentives, systems, and the behaviors they reward.
Key Takeaways:
Charles' Stanford profile: stanford.edu/faculty/charles-oreilly
00:00 Intro: Why Companies Die Fast
00:36 Meet Charles O'Reilly
02:01 Explore Versus Exploit
03:50 AI Substitute Or Complement
06:51 Adaptability As Culture
09:19 Resistance To Change
12:32 Microsoft Culture Turnaround
15:25 Ambidexterity And Lifespans
18:20 Ideate Incubate Scale
20:10 Scaling Needs Separation
24:44 Amazon PRFAQ Machine
34:33 Rituals And Failure Signals
38:05 The Debrief
📜 Read the transcript for this episode: here!
[00:00:00] Charles O'Reilly: The average life expectancy of a company in the Standard Poor's 500, I think in, in the next couple years will be around 12 years. So what that says to me is that the leaders of these organizations are not adapting and helping their organizations survive over a long period. We've seen companies be very good at ideation and incubation and fail.
And the reason they fail is that the third discipline is scaling. Once you have a validated idea, can you actually make sure that it gets the resources it needs to actually grow and take off?
Hi, I'm Charles O'Reilly, and I'm on the faculty at the Graduate School of Business at Stanford University. I've spent the last few decades actually trying to understand why some organizations succeed in the face of change and others don't.
And I'm looking forward to having a conversation about that, and really about what, what it takes to both succeed in your existing business, to exploit existing capabilities, get better and better, but also to leverage those into more exploratory activities. And so I'm excited to have a conversation about that, and especially as the role of, uh, artificial intelligence as it affects that.
[00:01:14] Jeremy Utley: Man, I am so... May I just say, I am really excited about this conversation. Um, this is gonna be a lot of fun. So Charles, maybe we could just start with this. The, the phrase explore and exploit has come up a bunch. It probably... I don't know, Henrik, what? Eight times in conversations? At least. Right? It comes up often, and we thought it would be really special to have a world-leading expert on innovation strategy come and talk about, not about AI, but about what do we know from decades of research about how to help organizations innovate.
[00:01:49] Charles O'Reilly: Mm-hmm.
[00:01:49] Jeremy Utley: And so we're delighted to get to talk to you, and just thought maybe you could start with a brief introduction to what does it mean, what does explore-exploit mean, why is it different, and why do organizations struggle with it?
[00:02:01] Charles O'Reilly: Yeah. So the term explore-exploit from an academic perspective was really came from a fellow named Jim March, who was a professor here at Stanford.
And he wrote a paper, uh, in 1990 that, that really talked about the problems that organizations face because when they get good, they, they get better and better at doing what is making them successful, and he refers to that as exploit. They're, you know, we're getting better and better at our existing customers, our existing technology, existing manufacturing.
But of course, when the world changes, then, uh, it requires organizations to do very different things, and that is to, you know, to look into the future, to try things, to experiment, to maybe fail, go down blind alleys, come back, and he refers to that as explore. What, what that has come to, I think, mean for people who study, uh, organizations is e-exploitation is really leveraging your existing assets and capabilities.
It's doing what is making you successful better and better, incrementally improving. Exploration is really, uh, about what you all are experts in, which is sort of innovation and coming up with new ideas and testing new ideas. And the, the difficulty that organizations face is, is that the very things that make them successful in their mature or exploit business, the metrics, the incentives, the, the, the skill sets The culture, the very things that help them be successful in their big, mature business really work against trying the things that you need to do in a world that's changing to explore.
And so that's the tension that explore and exploit captures.
[00:03:51] Henrik Werdelin: I was, uh, studying a company in China that did a interesting thing, I thought, because a lot of the companies we talk to when it comes to AI, they talk about AI as a m-- for, for the mechanism of saving money, right? It's, uh, making more efficient, fewer people.
Um, what this company did was that they found a way to really measure, like, how much money they saved with AI, and then they allocated the same amount of money into doing exploration. So they built- That's interesting ... venture studios or all kind of hackathons around that. And why do you think that so few of the companies that are currently thinking about AI are thinking about it in both an exploit and an explore kind of way?
Why, why lean to the exploitation?
[00:04:41] Charles O'Reilly: You know, uh, so you all are experts in AI, and of course I, I am not. But as I, as I think about AI, I, I think about it can have two very different types of effects on organizations. You can think about the substitutes and complements. That is, uh, AI can substitute for existing processes.
So if we look at, for instance, law firms or consulting firms, A-AI or accounting firms, AI is helping them do a lot of the, the work that used to be done or had to be done by people. It can be done now with AI. That is a, uh, in some ways a substitute. A complement is it helps you do things, your existing things, but it helps you do them better.
And so I think many organizations, and personally, uh, as well, I don't think we quite understand whether A-AI is gonna be a substitute or a complement. And in some instances, of course, it could be both, but the organizational response to substitutes and complements are, I think are, are quite different. If, if AI is substituting, if it's doing things that existing people, processes did, and it's now doing that, that suggests that you may need to be more exploratory.
If it's a complement, it's just helping you do things better, then it's, it's, it requires change, but it doesn't fundamentally alter what the organization is, is doing. Think of- think about something like drug discovery and the use of AI in drug discovery. That is a substitute, uh, I think. That, that is if we're in a big pharmaceutical company and we've got a bunch of computational chemists and we've been doing sort of drug discovery, and along comes AI that can do protein folding and...
You know, that's different, and we probably need a separate unit for more exploration. So, so I... it is complicated, and I don't think many organizations, Henrik, I don't think they quite know yet w- which of those two things it is.
[00:06:51] Jeremy Utley: Now, if, if you kinda set aside AI, so forget AI or just squint your eyes, it's just- Yeah
it's a technological change.
[00:06:58] Charles O'Reilly: Yeah.
[00:06:58] Jeremy Utley: We've seen this show before, right? Yeah. And you've seen it, Charles, you know- Yeah ... m- many times over the course of studying organizations. I know that adaptability is a key piece of this puzzle. Can you talk about adaptability as kind of a virtue, and how do organizations cultivate the ability to adapt to change?
[00:07:20] Charles O'Reilly: Yeah So you're right. I mean, uh, adaptability is high on the agenda of many senior managers nowadays. The way I think about a- adaptability is really from a cultural perspective. That is, to, to step back a little bit, if you think about culture not as something vague, but as a social control system in organizations, that is sort of expectations about how you have to behave to fit in and be successful.
So if you think about culture as something much more manageable, concrete, then the question of adaptability becomes, well, what is a culture that would promote adaptability versus a culture that would not permit adaptability? And a culture that promotes adaptability is a culture that, you know, encourages flexibility, encourages initiative, encourages, uh, some risk-taking, and by the way, has the, the support of, of those things.
But it's a set of norms and expectations that say, "Yeah, you know, you ought to be... In your job, whatever your job is, you ought to be experimenting. You ought to be trying things, seeing if you can get better." Of course, in, in big, successful exploit organizations, the culture is very different. The culture is sort of incremental improvement, compliance, you know, do things the way we've always done them.
It's kinda Kaizen in the Japanese context. And so the, the problem-- one of the problems with adaptability is I think if you're gonna, if you're gonna promote adaptability in, in an organization, then it's partly a cultural play. It's, it's partly a, a leadership issue. Hendrick, the Chinese company you're talking about, is very interesting.
I think leadership saying, "By the way, we're gonna, we're gonna measure this, and then we're gonna allocate, uh, resources to exploration," that's a leadership play. But it's also, it's also a cultural play. So I think adaptability Is in the main cultural
[00:09:20] Henrik Werdelin: I feel that Jeremy and I, um, meet a lot of people who have an AI role in our organization, and there seem to be a frustration sometimes from these folks, but also sometimes from the very senior management of the lack of kind of like interest in this new technology.
And I think from people across the organization, there's a little bit of like, yeah, but this is something that's really dangerous to me because if I became really good at this, I might even be able to show that my role is not, uh, can be done with, with this technology. Have you seen that dynamic before, and is there, like, advice on how to tackle that?
[00:10:05] Charles O'Reilly: So that's, uh, you know, I think that's classic resistance to change, and it could come from AI, but it could come from lots of other things as well. And so, I mean, one of the things that happens is, you know, in organizations is, as I get better and better about my job, and I learn how to do it, and then some-something comes along that says, "Oh, by the way, you could do your job more efficiently or in a different way."
And, you know, my, my identity is wrapped up in, in this, my livelihood, my status in the organization. So resistance to change, I think, is, is, is common, uh, for lots of reasons, and AI, I think, is just the latest thing that kinda makes people anxious a-about it. And, you know, you could have a whole separate conversation about how, and there are people who study this, how you overcome resistance to change, and, you know, there are some tools and techniques that you can use to do that.
But I think, Hendrik, to answer your question directly, I think, I think the resistance to change from AI is the same as the resistance to change for, for lots of things.
[00:11:10] Jeremy Utley: And what have you seen as successful strategies for the organizational leadership tactics to help folks overcome this resistance? Like, do you just need new people, or is there something you can do with folks who are resistant to help them?
[00:11:24] Charles O'Reilly: Again, uh, this is a little out of my, uh, my expertise, but fir-first of all, it's a leadership issue. Uh, if senior leaders are not encouraging people to try new things and do the sorts of things that Hendrik talked about, then people in deeper in the organization have a reason not to be enthusiastic about change.
So in the first instance, I think leaders have to signal this. Um, you know, I mean, we see senior leaders oftentimes Sort of doing the things that they want other people to do. That's a very powerful... If I'm deep in an organization and I see my senior leaders trying something new, then that says to me, "Well, this is important, and I should probably do this."
If I hear them talking about, you know, you ought to be trying new things, but I don't see it, then it's harder for me to do that. So, uh, I think being Explicit about managing change is, is, uh, important and senior leaders designing programs to, to implement change. You know, if we could go off on a long tangent here, but one of the companies that I think has done a terrific job of managing change over the last 10 years is Microsoft.
And it-- if you look at how Nadella and Kathleen Hogan, who's their chief people officer, if you look at how they manage that, that shift from Office and servers and Windows to mobility and, uh, cloud, it's a masterclass in, in how you overcome resistance to change.
[00:13:00] Jeremy Utley: What have we seen at Microsoft? I'm not familiar with the, with, with the internal tactics.
I'm familiar with- Yeah. Yeah ... what we see from the outside, but what do you know about what they've done?
[00:13:08] Charles O'Reilly: You know, so partly it was a huge culture change. I mean, they-- so they changed the strategy. Nadella said, "We're gonna move from Office, Windows servers to mobility and cloud." He did a bunch of symbolic things, like he, he, uh, embraced open source, which Ballmer and Gates had-- Ballmer actually said open source was a cancer on, uh, on, on intellectual property.
So from a leadership perspective, he changed the strategy. He changed the structure. He reallocated people in the organization away from Windows. He quit talking about Windows, started to talk about cloud and, and mobility. So at a leadership level, they did a bunch of things. But they also collected a l- a lot of data.
They got people involved around the culture. And then, you know, they asked people around the culture, they said, "What, what is it about the Microsoft culture that has made us successful that we wanna keep and preserve? What is it-- If we're gonna be successful in mobility and cloud, what is the culture? What are the norms?
What are the behaviors we need to be successful? And what, what are the norms that we have now that might stop us?" They collected a bunch of data, and then they had a big offsite, 180 senior people, and they decided on this notion of growth mindset as this kind of overarching meme or metaphor, and they decided on a bunch of behaviors that were characteristic of a growth mindset, of taking risks, of doing things differently.
And then what they did, which I find quite remarkable, is Kathleen Hogan, their chief people officer, she put together a, a little training program that helped managers at different levels think about what growth mindset was, what the behaviors are, how they can implement it. They trained 27,000 managers.
They, they drove it into the organization They changed the performance management system, they changed the training system. It's really a, a, uh, complete transformation. Which by the way, we're, we're now writing cases on some Japanese companies that are transforming themselves, and we're seeing a very similar sort of approach to how you overcome resistance to change with some of these Japanese, successful Japanese companies.
[00:15:25] Henrik Werdelin: Do you think that, uh, resistance to change is really the headline for why companies increasingly are, you know, not growing? I mean, like, I, I've read this thing about how in the '60s, a company would be in the Fortune 500 for 67 years, and now it's 18, expect to be 12. Is that changing? Is that the, the, the thing that they're not able to do?
[00:15:48] Charles O'Reilly: Yeah, I mean, that's one of the clear, uh, indicators of, of why some organizations are not adapting. I mean, you, you're right. The average life expectancy of a company in the Standard Poor's 500, I think in, in the next couple years will be around 12 years. And so if you think about what that means, what that means is previous great companies are becoming less and less relevant Or they're being replaced by other companies, or in some cases, they're actually going bankrupt.
And we see the, the rate of bankruptcies is increasing. Around the world, the rate of bankruptcies is increasing. So what that says to me is that the leaders of these organizations are not, are not adapting and helping their organizations survive over long periods. Now, of course, there could be some organizations where, you know, they're just-- they don't have the skills and assets, and they probably ought to go out of business.
But most organizations have, have assets and capabilities that they, if they were smart, they could apply to in these new ways and move into growth markets. That's the core of what we talk about when we talk about ambidexterity, the ability to explore and exploit. It's the ability of leaders to compete in your existing business with the alignment that it takes to do that, but to simultaneously leverage assets and capabilities into new growth areas.
And for me, those are the most interesting companies.
[00:17:17] Henrik Werdelin: If we look at the different methods for doing the exploration, we talked a little bit about the Chinese company that took kind of newfound gains for the AI and put it into hackathons. We've mentioned Microsoft that really understood how to change a culture.
I know that you spent some time on Cisco, and my understanding there is that they were very good of basically investing into staff members that then spun out and created something, and then they bought a lot of them back at one point. And then to go into completely different end, you have the SEAL team in the US that report straight to the president, then you have the new foundational models that sold themself as research laboratory.
And so if we think of that structures define the outcomes, and that we need architectural new kind of concepts for us to figure out how we go from being exploiting companies to exploratory companies, what would you suggest to people who sit and are trying to kinda pick a path, um, if, if, if that is kind of just a little bit of the, the pelé?
[00:18:20] Charles O'Reilly: Yeah. So that's, that's a big question. Um, so to, to go on a slight tangent, as Jeremy knows You know, we, we had the privilege of working with Jeremy and others over in the design school for, for years now with some of the executive programs that we run. And that really triggered in me because I saw how powerful their design thinking could be.
And it really triggered in me, well, you know, ideation, coming up with new ideas is, is very important. And you know, there are methodologies like open innovation, design thinking, CBC, hackathons. There are a bunch of methodologies to do that. But that's not enough. I mean, you have to be, uh, able to take these ideas that look promising and validate them, and that's what we call incubation.
And you know, again, we have methodologies to do that. I mean, you, Hendrik, you know about this with Venture Studios. We have Lean Startup, we have a business model canvas, we have a bunch of ways of doing that. And we've seen companies be very good at ideation and incubation and fail. And the reason they fail is that the third discipline is scaling.
That is, once you have a validated idea, can you actually make sure that it gets the resources it needs to actually grow and take off? And we've seen that in our experience, that's where many organizations fail Because when the time comes to begin to shift assets and capabilities from existing profitable but perhaps declining businesses into new growth businesses, that's where leaders often get very nervous because it affects profitability and, and the like.
So it's the scaling part, I think, that makes a difference. And in order to scale, especially when you have substitutes, you have to have separate organizations, because if you try to do it within the existing organization, it inevitably gets crushed by the weight of the existing... Let me give you an, an, an old SAP example.
So we, we had a chance to study SAP back in, uh, early 2000s. What SAP at the time realized was that the global market for their big, you know, $20, $30 million, uh, uh, enterprise resource planning systems was flat and gonna decline. And so the CEO at the time said, "We gotta get into growth markets." And the growth market was small and medium-sized business.
That was a software as a service play. And they had a good product or a, a reasonable product for that market, but they didn't set that up separately, and they tried to run it with a cross-functional team within the big functional organization. And what happened predictably was, you know, the, the pressures on selling ERP systems, the revenues from ERP systems, the incentives, and indeed the culture that rewards ERP systems was different, and so they, they, they failed.
They ultimately, what they did is they spent $11 billion. They made a bunch of acquisitions to get into this, uh, this, uh, software as a service business. You know, they're doing fine at it today, but, but they failed basically because they didn't set up a separate business. And that's, that's the pattern we see.
Most companies, I mean, you all have experience at this. Most companies, I think today understand the importance of ideation and incubation, and, and they understand how to do it, and they often invest in it The trick is to really scale
[00:22:02] Henrik Werdelin: I very much echo that. I, as I mentioned, uh, offline, I wrote a book called "The Acorn Method" about our experience in building corporate incubation, and I think exactly what you just said was often the issue.
We could incubate businesses and get them to a million or two or five million dollars in run-rate revenue. And then I think iconically you would go down to the CFO and saying, "I'd like another $10 million to scale this," and they would like-- "And for, for this non-profitable thing that you wanna take money off my balance sheet?"
Right, right. Like, no way. Exactly right. And so that what we call the A round crunch, which was really very easy- Interesting ... to do in the venture world, but very complicated to do in the corporate world.
[00:22:40] Charles O'Reilly: Yeah, exactly right. Exactly right. We saw, um, a couple companies, one big American company and one big German company, came up with-- They did the ideation incubation, and they came up with potentially really interesting products.
They did the ideation incubation, then they moved them into the existing lines business units. And exactly what you said, Hendrik, when the time came to say, "Well, okay, if we're gonna scale this, we need more resources," and the big business owners looked at it and said, "Well, wait a minute. That's a lower margin business.
It's not clear that we're gonna get the returns on it. If I take that same money and I invest in my existing business, yes, it's under pressure, yes, it's declining, but I can squeeze out margins, and I can make my numbers." And so that's exactly, exactly what we see happen.
[00:23:34] Jeremy Utley: Have we-- Uh, I don't know this.
Th-this could be a dead end, but have we studied Nvidia, Charles? Do we-- I mean, the scale of their growth and the kinds of new businesses. I mean, I heard they have a-- I can't even think what the business is. They've got a new business that's doing, you know, $40 billion or something that's kind of come out of nowhere, right?
Um, do we have any sense for what the mechanisms are or what the expectations are within Nvidia to drive that kind of growth at that kind of scale?
[00:24:02] Charles O'Reilly: Yeah, short answer is no. I mean, we've had, we've had some people from Nvidia come in and talk to classes, and they're clearly, uh, they're clearly very successful.
They've got huge amounts of resources. I'm always-- Not to take anything away from Nvidia, but I'm always skeptical. When companies have huge resources, they can do lots of things, and they can try lots of experiments. Um- You know, that it just allows them to do things that other companies can't. I, I'm not sure that's sustainable over the long term.
I mean, once, once the, the profits return to normal levels, now you're back into the, to the dynamic that we've been talking about. For, for me, the company that is, uh, in some sense the, the best example of a company that has figured out how to do explore and exploit is Amazon. You know, Amazon, if you think about what Amazon has done, they're 1994, one employee, zero revenues.
This year they're gonna be seven- $700-plus billion and 1.5 million employees. And if you look at how they've done that, and they run all these businesses. I mean, they sell everything online, but they're also in movie production, they're in healthcare, they're in satellites, they're in autonomous driving.
They're in, you know, all sorts of things. And they have a process that constantly allows the people to come up with new ideas. This what they call the PRFAQ process, which you may be familiar with, where anybody can come up with an idea, but they have to do it in an exceedingly rigorous way. They have to come up with a press release and frequently asked questions If, if that idea is accepted, they immediately get some release time.
They're set up as a separate team. They get engineering support. They're constantly doing-- They do hundreds, if not thousands of these experiments every year. Most of them fail. Now, that's okay because they're small. I mean, Bezos says, and I think he's exactly right, ideation and incubation are cheap, especially for big organizations.
Small teams of people doing experiments, not very expensive. It only gets expensive when, when you scale. When you scale, that's when you're gonna spend the big money. So I think Amazon is a, is a, uh, a, a lovely example of a company. It's partly a cultural play, it's partly a leadership play, it's partly a structure play.
It's a, it's a process to constantly set up new businesses.
[00:26:40] Jeremy Utley: That's a perfect example. I mean, I'm a huge, uh, fan of what Amazon has done. I think they're-- even take something as simple as a PR FAQ. The fact that any employee can basically make a proposal for a new, uh, exploratory project and immediately get released from their job if they get permission to do it.
Most organizations go, "No, no, but she's a great analyst. You know, we don't have any more great analysts." You know, I've-- the number of times I've seen that is just staggering.
[00:27:06] Charles O'Reilly: Yeah. So my favorite Amazon example, uh, which I, I think is real, I mean, I've asked a couple people, and they said, "Yeah, it's real." There was a clerk in the accounting department that was processing accounts receivable.
This is many years ago. And he noticed that there were individuals buying large quantities of office supplies. Thought that was odd. He looked into it, and it turns out these were small business owners who were buying business supplies for their businesses. And so he came up with a PR FAQ. They gave him some release time.
They-- turns out it was a business. Today, this is called Amazon Business, and the last I checked, it's a forty-billion-dollar-a-year business. They do, they do this constantly. AWS, AWS came because they rewrote the software, uh, this is back in early eighties. They rewrote their software to make it easier for other companies to sell on their platform, and some smart person realized, "We have excess capacity.
We could sell computing infrastructure." So to, to quote my colleague Bill Barnett, Bill Barnett says, "The job of a leader is not to predict the future. It's to design an organization that can discover the future." And that's what they did with AWS. They did not predict the future. They have a process where they discovered it.
[00:28:30] Henrik Werdelin: And to your point, they probably also have a culture that would allow-- 'cause I could imagine many organization where you come in and you're a book e-tailer and somebody says, "We're gonna, uh, rent out servers," somebody's gonna go, "Well, you should focus. That is not a clear strategy." And so there is a very playfulness to, to some of these companies, right?
[00:28:48] Charles O'Reilly: Yeah, although most people would not call the Amazon culture playful. That's true. It's a pretty, it's a pretty, it's a pretty- That's true ... tough culture. They actually have-- they have 16 leadership principles. You know, and you look at these 16 leadership principles, and you're kinda, you know, the tendency is to roll your eyes and say, "Oh, God, another set of principles."
Turns out that everybody is evaluated. Your performance management is based not on your, not on numbers. It's based on these leadership principles. So these leadership principles, it turns out, are, are deeply embedded and, and real in the organization. So that's, Hendrik, that's the culture play.
[00:29:25] Henrik Werdelin: That's cool.
That's really interesting, that that's the property of the person.
[00:29:28] Jeremy Utley: Charles, one thing that you don't know about Henrik but you should is he's obsessed with making himself intelligible to a language model, you know, via what, you know, a persona file, a soul.md file. One thing I've thought about is the leadership principles of Amazon are effectively their persona file.
They have- Hmm ... deeply codified. They're very explicit about what they value.
[00:29:51] Charles O'Reilly: Yep.
[00:29:51] Jeremy Utley: And the, the beauty of being explicit about what you value is you can then i-instantiate that in recruiting, in performance reviews. It, it starts to define performance.
[00:30:03] Charles O'Reilly: Yeah. Well, Microsoft did that too when, when they made this big shift under Microsoft.
They changed completely their recruiting process, where they recruit, what they look for, how they onboard people. So, uh, so again, it's a, it's a, it's an integrated system, uh, that characterizes these organizations.
[00:30:22] Henrik Werdelin: This is so cool. I'm gonna totally take their principles and then apply them to my-- uh, I have different agents that I do work with, and they...
I try now to have the agents nudge me towards things that I would prefer, like, so my, my principle and values for sure. But I think- Yeah ... I might try to become more Amazonian. Um, I had a question for you. In the, you know, obviously with somebody who's done so much research, it's always interesting to hear where kind of your perspective had changed over the last, uh, 40 years.
What would be something you thought when you kind of s-started out that you've si-seen since kind of changed your mind on?
[00:31:02] Charles O'Reilly: I hope I've changed my mind on a lot of things. Uh, no, I'm not sure my wife would agree with that, but I, but I hope that's true. Um, you know, I think, I think when I started out, so as Jeremy knows, my background is in the military, so I was a career Army officer for a while before I became an academic.
And so my model, my model really is kind of a, a military-- initially was a kind of a military model. And what that said was that success comes from aligning the organization. You've got to, you've gotta make sure that you have the right people, they have the right skills, you're measuring and rewarding the right things, you're structured in the right way, and you have the right culture.
And the evidence actually is that alignment does lead to, to success in the short term. And what happened very early on, um, a lot of the work that we've done is, I've done is with Mike Tushman, a, an old friend and colleague at Harvard. Mike and I were working with some companies. Actually you're, you all are too young to remember these companies, but companies like Syntex and Memorex and Data General.
They were, they were actually successful companies, and they failed. And it really, it really shocked me, because from a young faculty member's perspective, I thought that they had this great alignment. I thought they, they should be successful. And they failed, of course, because they were disrupted by other companies.
And that led to me thinking hard about this notion of needing multiple alignments, and that was really, along with Mike, that was really the, the recognition that If you're gonna be successful over long terms in the face of change, you really, as leaders, you need to be prepared to run multiple alignments.
And that's easy to say. It's easy for us to say, but of course, to actually do it is, is quite difficult. And so that was a big shift in my, in my thinking. What has not shifted in my thinking was the power of culture as a way of motivating, attracting and motivating and, uh, executing. I mean, the military and the, the more elite units typically have very strong cultures, and those cultures really make them successful.
And so for my entire career, and, uh, it's not just true in military organizations, it's true in not-for-profits and for-profits, that culture can be a very powerful, um, motivator. So that has, that has not changed The other thing I guess that has changed, Hendrik, is, you know, initially I think many of us, myself included, would look at charismatic leaders and say, "That's a great leader."
You know, you look at people who, who are charismatic, you know, the, the-- and they're engaging, they're-- they have visions. You know, they, they attract people. I thought that is-- that's a great leadership style. And what I've come to realize is, uh, that charisma is often dangerous. I mean, if you think about Elizabeth Holmes at Theranos, if you think about Adam Neumann at WeWork, you think about Travis Kalanick at Uber, they were all charismatic leaders, and they led their organizations right off the edge of the cliff.
So this notion of charisma as a positive thing, I think is... I, I've changed my view about that. I think, I think charisma can be quite dangerous.
[00:34:33] Henrik Werdelin: But sometimes I guess you need the charisma to create the culture, right? Like you, you-- I think you mentioned something earlier, which I thought was interesting, is that sometimes some of these, um, rituals are required, like some things that doesn't really matter that much, but y- it's kinda like-- I'll give you an example.
At BarkBox, for example, we have, um, we're the largest, uh, dog toy producer in the US. And, uh, I had this rule I called ban the bone. Uh, and that was because I thought when somebody created a, a design and they used a paw print or a bone, it was just lazy, right? It's the first thing you think of. And so we basically made it, um, you know, not okay to do that.
And I would kinda like, through a bit of theater, 'cause I didn't care that much, but I would kind of create a bit of a his-hissy fit every time somebody showed it to me. And so it obviously rumored, and so new people who came in, you know, if they did a paw print or a bone, they would suddenly get told by their colleagues, "Hey, you better not show this to Hendrik 'cause he's gonna have a meltdown."
And the idea was, of course, not about the bone and the paw print. It was, "Don't just do the obvious stuff. Don't just do-" Yeah ..."the cliché that everybody else is doing. Think a little bit further." And so I'll be curious on a little bit more nuance on your, on like these rituals and if you believe they're important.
[00:35:52] Charles O'Reilly: Oh, yeah, absolutely. Because they become symbols that carry the kind of message the way that you're describing, that the bone, if people get the message correctly, is not the bone. It's don't do the, the easy thing. I think rituals are, uh, are, are very important. Now, that said, by themselves, if that's all you have are rituals, it, it, it doesn't really work.
You know, so I think, again, it's this, it's this alignment- Backed up by culture ...of things.
[00:36:22] Henrik Werdelin: Yeah.
[00:36:23] Jeremy Utley: You know, one of, one of the key differences between exploring and exploiting is failure rate. Failure rate is much higher when you're exploring. And- I wonder, uh, speaking of rituals, have you seen, Charles, any rituals that help folks handle the higher failure rate in exploratory endeavors?
[00:36:45] Charles O'Reilly: Yeah. Rewarding people who failed is, is very powerful. What I was told, and again, I don't know this for a fact, but I was told... Remember the Amazon Fire Phone? Amazon decided that they need their own, their own cellphone, and it failed. Huge failure. The technical team that worked on that, everybody got promoted.
So think about you're, you know, one of 100,000 engineers in Amazon, and you just heard that the people who were a part of this big failure got promoted. What's the message?
[00:37:14] Jeremy Utley: Yeah.
[00:37:15] Charles O'Reilly: The message is it's okay. You know? So I, I... You know, I think, I think how people signal these things is, is important.
[00:37:24] Jeremy Utley: There's a similar story at Google X.
They do the same thing. They celebrate failure.
[00:37:30] Charles O'Reilly: Yeah. So s- yeah, celebrating failures is, I think, a good thing, but it signals what types of failures are appropriate and what types of failures are inappropriate. So you don't wanna just say, "Feel free to fail." I mean, you, you want people to understand what constitutes a good failure.
[00:37:48] Jeremy Utley: Right. Right. Being bold, being ambitious, not, not being lazy or sloppy.
[00:37:53] Charles O'Reilly: Yeah.
[00:37:53] Henrik Werdelin: I think Jeremy needs to figure out how to get his Wi-Fi a little bit better. The f- the, the failure of having your Wi-Fi cut out- ... is not one that is celebrated.
[00:38:03] Charles O'Reilly: We're not celebrating that.
[00:38:06] Jeremy Utley: Henrik, I, I was so excited to get you and Charles in the same room because you're, you're like, you're, you're brothers from another mother, so to speak, in terms of your obsession.
What... I'm dying to know what stood out to you from Professor O'Reilly?
[00:38:18] Henrik Werdelin: I obviously could have spoken to him for much longer about incubation, 'cause that seems to be a shared kind of like area of interest. Um, but I was trying to find like all the AI kind of angles in, uh, a- as I could. But I'll, I'll, uh, um, I'll definitely connect with him more on that.
I mean, like the one that I think is just so fascinating is this idea that most companies I know talk about celebrating failure, and nobody really does, right? Like very, very few. And so his case about having, um, people at Amazon getting promoted after making the Fire phones that wasn't successful, I think is just such a good example of somebody who bakes into their culture actually celebrating at least exploration.
Um-
[00:39:02] Jeremy Utley: Yeah. You know, do you know the other person who does that, and I was having Wi-Fi issues, I was trying to say this, but I don't think y'all heard me, so I'll say it now, uh, 'cause it seems like you're hearing me now. Is that correct? Yeah. Is that true? Yeah, yeah. Okay, yeah. It's all
[00:39:12] Henrik Werdelin: good.
[00:39:12] Jeremy Utley: Um, uh, Astro Teller does that at Google X.
You know, he's the captain of Moonshots at Google X, and one of his things is when a team fails, they have a public celebration, and he high-fives them, and he gives them bonuses, and he tells them to take a vacation before trying the next thing.
[00:39:30] Henrik Werdelin: Yeah.
[00:39:30] Jeremy Utley: But it strikes me that in these environments that are by nature exploratory, that they're explicitly exploratory, special attention is given to rewarding big swings.
[00:39:43] Henrik Werdelin: I think that makes a lot of sense. And I think on the team alignment culture piece, the other element which is interesting is this idea of celebrating and kind of like, uh, compensating people based on their behavior, right? He was mentioning at Microsoft... Uh, sorry, at Amazon you have these 16 principles, and their bonuses is based on that, and he talked about how at Microsoft they had 26,000 people, something that went through this new growth mindset leadership kind of program.
And I find it fascinating 'cause I think a lot of people talk about culture, and then they go like, "Culture this, culture that," but you just have to make your numbers. And so- Obviously what measured gets done and people will tend to lean towards, you know, the thing that they get compensated against. And so I do find that to be a fascinating kind of just approach.
[00:40:31] Jeremy Utley: You know, one thing I really loved when we asked him about leading, uh, exploration, he said something that reminded me of Brad Anderson from Qualtrics. He said, "Do the thing you want people to do. Don't just talk about it."
[00:40:43] Henrik Werdelin: Mm-hmm.
[00:40:44] Jeremy Utley: Yeah. And it reminded me of Brad, right? And his experimentation and showing his screen and saying, "Here's the cool stuff I'm trying with AI."
It was inspiring to me to think about a leader as not as someone who tells others what to do, but as someone who embodies the thing they want done.
[00:40:58] Henrik Werdelin: And then, you know, lastly, I think you got the sense also that he has done more studies and spoken to more leaders than I think most people that we've ever spoken to, and yet his message is also like, "This is complicated.
This is not trivial." Like these, these things have nuance. You know, it's not just about making a ritual here and then not backing it up again. It's with culture or like with what you measure and these other things. And so it's a very kind of holistic package of things you have to do, which obviously makes it more difficult, but also I think makes it more understandable that more people are not doing it.
[00:41:33] Jeremy Utley: You know, I really liked-- I, I wanted to push... There, there are a lot of areas we could have gone deeper, but o-one example or anecdote that he gave about Microsoft and saying, the way I heard what he said was it's kind of a pre-mortem on their culture. What, what about our culture should be kept? What should be nurtured and what should go away?
I think is a really fabulous conversation for leadership teams. He, he mentioned that they did that survey, you know, 180 senior-most leaders. But to talk about what is, given the changes that are afoot, what about our culture serves this new world and what about our culture is actually hindering us moving forward?
I wonder whether having that kind of conversation on a rolling basis-
[00:42:14] Henrik Werdelin: Hmm ...
[00:42:14] Jeremy Utley: would actually be quite helpful to it, or as the world is changing, it's a, there's a high likelihood that some things that we fi- that we do normally, we should stop doing.
[00:42:23] Henrik Werdelin: Yeah.
[00:42:24] Jeremy Utley: There's, there's other things that we don't do, maybe we should start doing, right?
And making that an explicit kind of culture, almost barometer, temperature check and thermo- or you know, not thermo- thermostat, right? Think about the, like it's one thing to have a thermometer, which is the survey, but to have a thermostat where you say, "Actually, we're gonna set a new direction," right? Yeah, I think makes a lot of sense.
I think, I think that-that's a great example.
[00:42:45] Henrik Werdelin: It's a little bit, I think, what Bryce did over at Moderna, right? Like, he was talking about how some of the first things he did was really understand where were people and then kind of like changing the temperature, as it were, uh, around that.
[00:42:57] Jeremy Utley: Mm-hmm. Mm-hmm. Mm-hmm.
[00:42:58] Henrik Werdelin: Awesome. Anything else?
[00:43:01] Jeremy Utley: What, what is Bryce's statement? Never th- uh, don't think until you listen, or never think before you listen, or something like that. I thought that was... That's a beautiful phrase that stuck with me.
[00:43:12] Henrik Werdelin: I didn't pay attention.
[00:43:15] Jeremy Utley: Irony much.
[00:43:17] Henrik Werdelin: There you
[00:43:17] Jeremy Utley: go. Hashtag, if you enjoyed this episode, please leave a comment, #irony in the comments.
[00:43:24] Henrik Werdelin: Awesome. And with that, the only thing that's left to say is to say bye-bye.
[00:43:28] Jeremy Utley: Bye-bye.