[MUSIC]
I want to start out with a story.
This is a story about a sergeant in the Army, Edwin Montoya,
and he was stationed in Iraq.
It was just before Christmastime.
And he was in the mess line getting some dessert, in fact it was cheesecake.
And as he is sort of standing there grabbing his cheesecake about to start
eating, there's a major explosion, a huge explosion.
A terrorist has set himself off and blown up the mess hall.
And Sergeant Montoya dives under a table.
When the noise deadens he comes out, takes a look, and he's okay.
But he's a medic, and around him is a carnage of people.
All sorts of people, some not so badly injured, others very badly injured.
And as a medic, his job is to think about who am I going to treat, and
who am I going to really not be able to help, or
who can make it on their own at least for a little while?
And so he's faced with that enormous complexity and enormous uncertainty, and
what does he do?
And what he does is he does what a number of people do
ranging from that grandmotherly Janet Yellen to crickets to Mark Zuckerberg.
He faces complexity with simplicity, and in particular simple rules.
And Sergeant Montoya invokes the simple rules of medical triage,
in his case Janet Yellen facing some of the complexity of the federal reserve,
the US economy, the global economy.
Actually has some relatively simple rules around interest rates that revolve around
a number for inflation.
It's got to be over 2% and a number for
unemployment, it's got to be below 5% before she'll raise rates.
Mark Zuckerberg is also facing some complexity,
has some simple rules especially around hiring.
And crickets, you're probably wondering why crickets are in the picture.
Well, if you're a cricket, you've got a really short life span and
you've got a really small brain, you have to keep it simple if you're a cricket.
So they're definitely into simple rules.
What is a simple rule?
Simple rules are shortcut strategies that save time and
effort by focusing your attention and simplifying how we think.
So basically a simple rule is a rule of thumb.
Maybe get a little more granular though because you might have already
thought of that.
This is 1.0 on simple rules.
First of all simple rules are simple.
That means of all things, simple rules are two to five rules.
Not a lot of rules, two to five, something you could remember.
Second thing is simple rules depend on the person and situation.
So the rules that you have might not necessarily be my rules.
And then thirdly, simple rules relate to a specific activity.
There are not platitudes like, be nice to your mother, or
the customer comes first kind of platitudes.
Let me give you a few more specifics.
Some rules are simple.
So the three food rules of Michael Pollan.
Many of you know or have probably read Michael Pollan's book.
Michael Pollan is the Is the well-known University of California Berkeley
professor who wrote the Botany of Desire, The Omnivore's Dilemma, books like that.
On many refrigerators around the world, people have posted
Michael Pollan's rules for eating, and his rules are pretty simple.
Eat real food that your grandmother would recognize.
So if your grandmother wouldn't know what it is, don't eat it.
Small portions and eat mostly plants.
Now, if you think about within that, that's real easy to remember, and
yet you can eat cantaloupe, kale, blueberries, fish and
meat occasionally, lots and lots of plants, but not too much.
So fairly simple, yet it doesn't really restrict you all that much.
Second idea, several rules depend on the person's situation.
The skinny middle aged guy is Michael Pollan.
He has one set of rules.
The other people are Stanford football players.
They actually have their own eating rules.
Stanford football team's eating rules are, eat breakfast because they're students,
and if you recall your student days you stay up late, and get up late and
often skip your breakfast.
Eat your breakfast is the first rule.
The second rule is stay hydrated,
because these are active young guys and they tend to get dehydrated and
that's not good for your body, so they're supposed to drink water.
And the third rule of the Stanford football team for eating is,
eat as much as you want, as long as you can pick it, pluck it or kill it.
If you think about that and it's got some similarity to Michael Pollan right?
Your grandmother would recognize anything you can pick, pluck and kill so
basically an emphasis on non-processed foods, but
beyond that, the rules are pretty different.
Stanford football players are not into portion control.
They're into eating as much as you want.
Stanford football players are not into mostly plants.
They eat a lot of protein and they need a lot of protein.
They're growing people who need to build muscle.
So the point is, simple rules depend on the situation, they depend on the person.
Giving that we're sitting here in the business school,
let me give you more of a business example.
This is a comparison between Indiegogo and
Kickstarter, the two crowdfunding platforms.
Indiegogo has a set of rules around which kind of projects can be on Indiegogo.
The rule is pretty simple, it's anything goes as long as it's legal.
So, you can fund your root canal, you can fund your trip to Europe, you can
fund your business, your movie, your Jamaican bobsled team, whatever you like.
Or you at least attempt to fund it on Indiegogo, as long as it's legal.
By contrast, Kickstarter has many more rules.
In particular,
Kickstarter has some rules around that you have to fit in certain project categories,
typically around the arts, although they do have some business categories.
But you have to fit into about 13 categories, and Kickstarter over
the years has kicked out about 25% of the projects that are submitted to it.
And it's also curated by real people who are looking for the merit of the project.
So what's the point here?
The point here is the same activity, picking Crowdfunding projects,
different rules.
Why the different rules?
I think it partly reflects the background of the founders.
Indiegogo is founded by a of people, actually Berkley people
and it's an egalitarian philosophy.
Essentially the idea is, who are we to tell who can be on the internet?
The internet's for everybody and we're not going to be gatekeepers.
Everybody deserves the opportunity to grab a rich uncle off the internet.
In contrast, Kickstarter is coming out of a background out of the arts.
In fact one of the founders explicitly was thinking about Kickstarter
as a way to publicly fund the arts.
The arts are as a curation model and
they were simply picking up on the curation model of the arts.
So same process, different rules, different people.
Finally, simple rules refer to a specific activity that you do repeatedly.
So, for example, choosing foods.
You choose foods everyday, specific activity.
If you're Kickstarter or Indiegogo you pick projects everyday.
So these are repeated things that you do everyday, focused activities.
What are they not?
What they're not, is for example, they're not simple rules for who to marry.
One assumes that you only marry once or twice or maybe three times.
>> [LAUGH] >> But, it's not a repeated activity.
[LAUGH] So, there's no simple rules for eating.
As I said before, simple rules are not about some
massive opportunity or platitude.
So, for example, there aren't civil rules for curing world hunger,
that's too complex a project.
So, it's focused on particular activities that you do often.
Okay, that's the beginning of the story, simple rules 1.0.
Simple rules 2.0 is telling you a little bit about types of rules.
It turns out that there are different kinds of rules.
And that's relevant for a couple of reasons.
One is, some rules are easier to learn than other rules.
So some are easy, some are hard to learn.
Secondly, somewhat ironically,
harder learn to rules tend to be more high performing, lead to higher performance.
So learning the harder to learn rules is more related to high performance.
And the final reason it's important to learn the different kinds of rules is
because having a repertoire of rules is also more
effective than just having one kind.
So, that's why we're going to talk a little bit about kinds rules.
First rule I mentioned to you was a boundary rule.
A boundary rule people use when deciding yes or no.
For example, you're a judge and you want to design yes or no on bail for
someone who's under arrest.
Or which alternative do you choose among a lot of alternatives?
So most, two kinds of situations.
So whenever you have mutually exclusive alternatives or
you just have too many alternatives and you've gotta pick one.
Give you an example out of Google.
When Google was less complex than it is now there were some problems
around trying to get product development projects done quickly.
How to keep up with search features, for example.
And there was some thinking about how do you actually develop products faster?
And maybe we should reorganize the way we do product development.
A number of other ideas.
Finally came up with the idea what was really stopping them and
slowing them down was their hiring.
And they decided the key was, how do we hire top computer scientists faster?
Because in general, top computer scientists are way more productive than
not so top computer scientists, average computer scientists.
So how do we get those people?
And so they came up with a couple of rules.
Some of it was around, just go to top schools and look for
people with good grades and that was sort of something you would do.
But the other rules were more subtle.
One of the rules was look for people who are eccentric,
people who've ridden unicycles, or gone to the Himalayas for
six months, or been a stay at home dad or something that was out of the norm,
although maybe stay at home dads getting more popular.
But, in general, it was people had done something you had never seen before.
The idea behind that was they found that people who were unusual,
were also creative and that's the kind of person they wanted.
The second rule was favor, people who'd been referred to them by
other Googlers so, Googlers referring future Googlers.
And there the idea was that a Googler knows what a good Googler is, and
by the way they also want to work with good Googlers.
They'll be a good source.
And then the third rule was if you see any inaccuracy in the resume or
that comes out during the process, don't hire that person.
We want high integrity people,
any fudging any inaccuracies on your resume and you're out.
Within that then you can hire who you wanted but
it cut down the number of people that they were focusing on, and
they started to focus on the people they really wanted.
Another example of that is a company that we did some work with called
Frontier Dental.
They had an innovative products around dentistry, around in lace crowns.
That sort of thing.
And their problem was they thought they had a great product.
The industry, media thought they had a great product.
But it wasn't selling.
And they were going to dentists and maybe they'd call 100 dentists and maybe two or
three would talk to them and maybe one of them might buy it.
So, they were spending a lot of,
spinning their wheels a lot of times trying to sell the product.
What'd they do?
Whey went back and started looking at who had actually bought their product and
was using it.
They also thought about what their ideal dentist was and
then came up with some rules.
The initial rules weren't very good.
They were things like, the ideal dentist is between 35 and 50.
Well it turns out it's really hard to tell how old somebody is.
So what they ended up doing was going to really something very simple.
We'll call on dentists with innovative websites, because that's a signal that
that dentist has money and that dentist is forward looking.
So they looked at how innovative the website was.
Second thing they looked at was credit scores.
If a dentist has more than two dings on the credit report in the past year,
don't go there either.
So, they want an innovative dentist who pay their bills.
>> [LAUGH] >> Final example,
just some boundary rules, just a quick one.
This is the Weinstein Company, I don't, do you see that very well?
>> Yeah.
>> Can you see it okay?
That's a picture of the imitation game that you may recognize from
the movies last year.
The Weinstein Company as brought you The Artist, The Talented Mr.
Ripley, Chocolat, actually back in the day,
Pulp Fiction, The Imitation Game, Silver Linings Playbook.
A number of top Hollywood movies.
They are known as a movie studio that is both creative and
makes a bunch of money, so the nirvana of the tech world, if you will.
I won't go into all the rules, but one of them I think's kind of interesting is,
every movie has a flawed but sympathetic main character.
And so in the case of Alan Turing if you saw that movie he is a real jerk, but
you do feel empathy and you like him, I think most of us do.
Same with Silver Linings Playbook.
It's about a couple of people who are, get romantically involved,
who are both have mental illness issues and again,
they're both difficult people but you care about them.
So isn't that every movie, you're saying to yourself?
Well, if you saw The Gone Girl, or
Birdman, there was nobody to like in those movies.
So the idea here is you, they're flawed but you like them.
Let me go to another kind of rule.
This is a how-to rule.
Guiding the basic steps of executing a task.
Give you a couple ideas here.
What is Airbnb?
As I'm sure many of you have probably used Airbnb at this point,
you may also know that the Airbnb founders stumbled around for
about a year and a half after they rented out a room in
their apartment with an air mattress and a bagel.
So they sort of stumbled around trying to figure out what the model was.
Finally joined Y Combinator and
ended up going to New York to try to figure out how to build their business.
One of the early rules and I think one of the most important rules they developed,
first of all, the focus on hosts.
But secondly hosts always should have professional pictures taken of
their properties.
Why professional pictures?
What that did was it made the properties on Airbnb look slightly better than
those properties on sites like Home Away or Vacation Rental by Owner, whatever.
The other incumbents.
Slightly better-looking properties, slightly more likely to get the renter
because a virtuous cycle of more and more building of the Airbnb.
Host and guest size of the market.
Another simple rule that they had was, all hosts should leave local tips, so
tips about the local farmers market, the subway station maybe leave museum passes.
The idea there was to differentiate the Airbnb experience from a hotel.
It's personal, it's about you, it's local.
And that was a signal to people that it was a local experience.
The other how-to rule is actually coming out of Twitter.
This is from the executives at Twitter.
Those of you who are still working,
you probably spend way too much time in meetings.
And that was what some of the Twitter executives decided they did.
They decided to have some rules which kind of ironically for
me anyway were about PowerPoint.
And the rules were no PowerPoint.
And if you commit to going to a meeting, you have to show up.
So why those two rules?
Why no PowerPoint?
Well, because they decided that everybody was wasting way too much time on making
PowerPoints.
And secondly, people talk to much when they have PowerPoints.
So, don't waste your time making a PowerPoint,
don't talk too much, just come to the meeting.
Why the rule about you can't cancel out?
Because, if you have a meeting that has four or five people and
one person doesn't show up, it detracts from what the point of the meeting was.
It mattered that that person wasn't there, you can't really accomplish what
you've wanted to do, you've sort of wasted everybody else's time.
So, you gotta show up.
And finally, this is The White Stripes, which is a band that
had probably one of the number one albums of the 2000s, the White Blood Cells.
They're not as you would imagine from that picture.
There not exactly rule bound kind of guys but the point of this particular slide,
is to say that many people associate rules with lack of creativity.
And I think that's actually wrong.
A few rules is actually more creative than no rules at all.
You need some kind of constraint to play off.
And in the case of The White Stripes, what they did was they created their album,
and they did 18 songs in 10 days.
And they did that with, among other things, a few simple rules.
One of the rules was no solos.
No covers, which means not playing anybody else's songs.
No blues, no guitar solos, no bass.
Other than that, you can play what you wanted to play.
And so the point here is,
that again, you need some kind of constraint to be creative.
And what's in fact happening, people say, oh, think out of the box.
And I think what the real thing to say is, create your own unique box and
then play it within that.
That's where the creativity's coming from, at least part of the creativity.
Okay, how to and boundary rules are pretty easy to learn.
Let me talk a little bit about some harder leaned rules to learn.
Timing rules.
Timing rules are harder to learn, but they matter.
What are timing rules?
Deadlines, rhythms, sequences.
But they matter because they help you get things done,
they help you get things started, they help you keep momentum when you have it.
Given that we all got up early this morning,
one set of rules is timing rules are on insomnia.
So there's some interesting rules that seem to work, particularly for
elderly people.
And they are simple rules of, go to bed when you're tired,
get up at the same time every day.
Two simple rules about time.
Go when you're tired, get up at the same time.
Back to the business world.
This is actually Pixar, an example from Pixar.
Pixar, as you may know, the first hit was Toy Story.
And Toy Story was a movie that took Pixar about four years to create.
And, after the glow of the success of Pixar of Toy Story wore off,
the Pixar executives started thinking to themselves,
how do we make a real business if it takes us four years to create a movie?
That seems too long.
How are we going to get top talent?
And so they started thinking about what are they going to do about that?
And realized that what they really wanted to do was release a movie every year.
So they developed a rule that says, we'll release a movie every year and
we will release it at Thanksgiving, which then hits the holiday season.
So, every year, holiday season.
That is not so easy to do if you think about it,
because what they had to do is take a four year process, and
what they did was essentially chunk it into year long blocks.
So there'd be a year one, year two, year three, year four, roll it.
And then having to understand what they could get done in the first year,
the second year and the third year, and had teams that handled each year.
So you basically built a pipeline,
which essentially made movie-making something of a factory.
With a very long time in each step, about a year a step.
And so they don't necessarily release a movie every year and
occasionally they'll have a movie, in fact it just happened this year,
where they weren't happy with the quality of the movie.
And so they didn't release on time.
But normally they hit it.
Occasionally they go to say a June release.
But mostly they're hitting that Thanksgiving new release,
Thanksgiving new release.
Another example, is a company that you probably don't recognize.
It's a relatively young company.
It's called Primekss.
Their business is concrete, one of the businesses is concrete.
You probably haven't been thinking much about concrete lately but
you may know that concrete and cement,
it's derivative, is the third leading cause of CO2 pollution in the world.
So it's a massive contributor to global warming.
And what the guys at Primekss did was come up with a new concrete.
And first of all, they did that by going back to ancient Egyptian texts.
The Egyptians were the first to do concrete.
And realized that what the Egyptians, and later on, the Romans,
who were also heavy users of concrete, were doing, was they were adding blood and
horsehair to the concrete.
So they start thinking, well,
blood and horse hair's not exactly 21st century, what are we going to do?
And they proceeded to figure out a modern equivalent of blood and horsehair for
their concrete.
What it did was, it cut the CO2 pollution in half in the making of concrete.
And also allow builders to use less concrete,
and that concrete was less likely to crack.
So it was both less polluting to make, and you used less of it and
had to replace it less often when you actually got it in service.
So they had this really great product.
The question was how to sell it.
They went to Las Vegas, a Las Vegas trade show.
They had all kinds of partners around the world who wanted to get in on this
concrete.
How to choose, this is a small company.
How do we choose, who do we want to partner with?
They came up with a couple of simple rules to sort it out.
One was, don't have geographically overlapping partners.
If it's one geo, it's one partner, pretty simple.
Second thing they came up with was a little more subtle, and
that was partner with people who have laser screened machine.
You and I probably don't know what a laser screened machine is, but
in the concrete world, people know, and it's a signal that this is a company
that's innovative, and high-quality, and progressive.
So, similar to the Dennis website, builders with laser screen machine,
was a signal of a certain kind of contractor.
The third, because this is timing rules now, the third was a timing rule.
And that was, we're going to get a new partnership every three months.
So every three months we're going to get a new partnership.
Three months, three months, three months.
We're a small company, we can't on-board people faster than that.
On the other hand, we don't want it to stretch out too far.
They figured they had the capacity for three months.
Moreover, being on a rhythm, much as it did for Pixar, allowed them to
synchronize their internal activities around engineering, sales and so forth.
So they know every three months we bring on a new partner.
Every three months is a new partner.
Timing rules are fairly difficult to learn.
But the hardest kind of rules to learn is stopping rules.
We've probably all been in situations where we bought a stock and never sold it.
So we may have rules for buying but not selling.
We're in a relationship but we don't get out.
We have difficulty when to call it quits.
So most of us can choose to do things,
many of us have trouble getting out of things.
And yet it can be that we're running out of time and resources.
It can be that more promising opportunities exist.
So our friends at Primekss Not only had the rules I just told you,
but they had a stopping rule.
And that was if a partner has not sold our product within three months,
we end the partnership.
They were too slow.
They weren't that interested.
We made a mistake.
Time to move on.
This is a picture of Steve Blank, who is know for the lean launchpad.
He teaches, I don't think he teaches at this school, but
I'm in the school of engineering, and he's over with us in the engineering school.
But Steve has a couple of rules about starting entrepreneurial firms.
Some of his rules are how to rules about how to find customers.
He's famous for get out of the building, talk to a hundred people,
do it face to face.
That's the first step.
But he also has the back end of when to stop.
When do you decide it's time to pivot and
when do you decide this product is not going anywhere.
And his rules are after you've talked to your 100 customers out of the building
face to face.
Do customers see a problem?
Number one.
Number two, do customers want to solve that problem?
Number three, will customers pay to solve that problem?
Well, in the end, will they pay you?
And number four is can we actually solve the problem?
So yes, you solve those four questions, and if the answers are no for any one of
those questions, you move on because that product's not going to make it.
So four simple rules, does the customer see a problem?
Will the customer pay to solve it?
Will they pay us?
Can we do it?
Finally, final stopping rule, this is Mount Everest.
Many of you have probably read the book, Into Thin Air,
that talks about the death of about eight climbers in 1996 on Mt Everest.
And in that climbing expedition the leaders of the expedition,
Scott Fischer in particular, had a stopping rule, and
that rule was, if you're not on top by two in the afternoon, you leave.
You turn around, no matter where you are, you turn around.
On the day that these eight people died in an avalanche,
they were on top at four o'clock.
Had they followed their own stopping rule, those people would be alive today.
But they didn't and tragedy came about.
So those are some of the key rules.
Stopping rules being hard to learn.
going to say just a couple things and then maybe open it up to you all.
How to create simple rules.
I thought that'd be kind of an interesting thing to talk about.
Three steps, what's your objective?
What do you want more or less of?
Keep it specific.
Find a bottleneck.
What's really keeping you from your objective?
And craft the rules.
How do you actually figure out the rules?
Finding the bottleneck is probably the hardest thing to do.
Determine the objective.
We'll maybe mix it up a little bit, have a little bit of alumni stuff here.
This is the Stanford football team again.
What's the objective?
Well you've probably all wondered how Stanford went from one and
11, to a football powerhouse.
In fact, I don't know about you,
I kind of find it a little strange that I went to a football powerhouse.
>> [LAUGH] >> [LAUGH]
In some ways, I was more comfortable with
the old four and six Stanford when you could always get a seat.
>> [LAUGH] >> But that's not our world anymore.
And you're maybe wondering how that happened.
One of the big, if you think about the problems a Stanford football team has
is there aren't that many guys who are smart enough and
can get into Stanford and can also play Division 1 football.
That's a very small pool of people.
And our team is a relatively thin team of talent.
You know, there just isn't that much talent.
And so it turns out there were a number of things that happened.
One of the major ones was a guy name Shannon Turley,
who is our director of strength training.
He has a more elaborate title now, but
he is basically the head of strength training for the football team.
The football team put a lot of emphasis on strength training.
But unlike other programs where the goal of strength training is to
bench press hundreds of pounds, and clean jerk hundreds of pounds,
and wear t-shirts that said your personal best in lifting was something.
You know, essentially being strong.
Shannon changed the objective, because as you think about the team, he changed
the objective to, it's not getting guys stronger, it's keeping guys injury-free.
Which is not only morally, I think, appropriate, but it also turned
out to be strategically important for Stanford football in particular.
And under Shannon, the Stanford, from basically the first couple of years,
Stanford dropped their serious injury rate 90%,
with a strategy that was around, what's our objective?
Our objective is to keep the guys healthy.
And so they're on the field.
because when your guys are not healthy,
even though they might be great, they're not on the field.
And so thinking back, what's our real objective,
what's our strategic edge, was actually very helpful for Stanford football.
And this focus on keeping players injury free.
So that's first the kind of a give you an example of objectives.
It's thinking harder about what it is you really want.
Sometimes it's revenue.
Sometimes it's cost.
Sometimes it's growth.
Sometimes it's profitability.
And sometimes it's something like,
in the case of Google that I mentioned before hiring top computer scientists and
the case of Stanford football staying injury free.
Second step is finding the bottleneck this is being House of Cards.
This is the bottleneck that Netflix had.
Netflix was faced with a situation as you may remember
where the cost of content is coming very high.
So Hollywood movie studios has figured out the streaming game and
were starting to charge Netflix a lot and their margins were being squeezed.
And so Netflix decided on original programming,
the first of which was House of Cards and this is Kevin Spacey and
Robin Pen writer, write pen, or write, I think it's just write now.
See I'm not having a simple rule for getting married.
Anyway, so what's the bottleneck?
Turns out the objective of Netflix was to a large extent, creating buzz.
They wanted media buzz because how else were they going to stand out against, for
example, HBO?
So they thought well for
most of television, what we call television, it's great writing.
That's what really makes a great show.
What makes Mad Men great, what made the Sopranos great?
It's great writing.
And so at Netflix they said well you know we have to have great writing because
otherwise, we can't complete.
But you can't win with great writing.
And so they thought further, what is the thing that will really win for us?
What will make us stand out and give us buzz?
And there they changed the bottlenecks, and they addressed two bottlenecks that
most of, in fact all of the entertainment world on television is not doing.
One of them was directing.
Let's have A-list directors.
And so they hired Kevin Fincher to be their director and
then Kevin Fincher proceeded to bring in other A-list directors.
Kevin Fincher did the social network, the Dragon Tattoo,
the movie with Brad Pitt about the guy whose life goes,
he starts old and becomes young, Benjamin Buttons, that movie.
So an A-list top director.
And then, he had top directors working with him as well.
Why that bottleneck?
What did that bottleneck do?
It gave House of Cards a unique cinematic by using top quality movie directors.
So House of Cards simply looked Different.
And that created a buzz for House of Cards.
It was a different looking experience on the small screen.
The second bottleneck they attacked was programming.
Traditionally in the entertainment industry, one buys pilots for
a show, like two or three pilots, then goes six pilots.
Maybe then buys a year of shows.
And then secondly, releases those shows one a week.
House of Cards changed that.
Netflix, not only did not buy pilots.
Netflix bought two years of House of Cards.
Two years of episodes.
And released, as you may remember, the first year all at once.
So you could binge watch.
Both binge watching and
the buying two years worth were major breaks from what most people had done.
It created a lot of media buzz around House of Cards,
got people watching House of Cards.
People started binge watching House of Cards.
People told their friends about binge watching House of Cards.
You didn't have to wait until the next week to see if you liked the show,
and so on.
So the point is that they went to two simples rules as they then continued.
Use A-list directors, on that side, but
also buy in bulk and let people binge watch, release it once.
Now that of course looked risky for
the average entertainment company in Hollywood.
It was not so risky for Netflix.
Because as the Netflix guys say.
We knew you'd like House of Cards before you knew you'd like House of Cards.
They knew from their data on the streaming services Netflix subscribers like
Kevin Spacey, they like David Fincher and they liked the old British House of Cards.
They were sure House of Cards was going to win.
They could take a bet on buying in bulk.
And actually ending up paying a lower price.
Secondly, they knew you were already binge watching.
Even though regular media companies didn't know it.
Netflix knew that their subscribers were already watching two to three, four,
five, six episodes of whatever at once.
So, what's the point here?
They found some unique bottlenecks and then created rules around those.
Finally, creating the rules.
I'm not going to say too much about that, but
we can talk a little later about it if you like.
Creating the rules is fairly straightforward.
What companies do, and
this is actually a restaurant chain in Europe based in Czechoslovakia.
And they were developing some rules around what menus to offer in their cafeterias.
What they did wa, first of all, what their market was, they were based in Prague.
And their market they decided was going to be Western European and U.S.
companies coming to Prague, and looking to have a better food experience for
their employees.
So the Cisco's, the Google's,
the Facebook's, those kinds of companies coming to Prague.
That was their market.
They got some great chefs.
They started serving great meals and they started losing money.
So everyone loved the service, but they couldn't make any money on it.
So what they decided was their objective was making money.
Their bottom like process, they decided was menu planning.
And then they had to figure out their rules of menu planning.
Prior to that, there were really no rules.
The chefs just had a great time figuring out whatever they wanted to make and
did that.
What they did was engage the chefs in creating the rules.
So that's the thing you usually want to do is have your employees engaged or
a family member if it's family rules.
Engaged in the process.
Started looking over their history.
What meals did people like?
What meals were profitable?
Started thinking about that.
Came up with some rules that basically put some discipline on the chefs.
And the rules were, set the menu by Wednesday of the prior week.
Five meals a day at every cafeteria, three meals have to be best sellers,
two meals have to be the same across all the cafeterias.
So we get some economies of scale.
Within that, oh, and try and locally source or at least seasonally source,
because it turned out the chefs were ordering up oranges in January.
And there were no oranges to be found in Prague.
So, those simple rules.
Wednesdays, five meals, two the same,
three best sellers, locally sourced or at least seasonally sourced.
Within that, do what you want to do.
And ending up with a, they became profitable in six months,
and grew their business by over 50% in a year.
So basically worked out well for them.
But the keys to finding the rules were having the people who use the rules
figure out the rules, looking at their own experience.
They also brought in an outside consultant to give
them just an external point of view.
So it's look at your experience, bring in an outside source, and
perhaps ask your employees who were involved to do it.
So to summarize, and maybe to end up with
Leonardo Da Vinci, simplicity is the ultimate sophistication.
And keep it simple.
So that's what I got for you and hopefully you'll have some questions.
>> [APPLAUSE] >> Thank you.
Thanks.
Any questions this morning, anybody's got?
Yeah, could you use a mic if there's one nearby?
>> Thank you very much for that fabulous articulation of the simple rules side
of the equation you presented in the beginning.
>> Okay. >> I wonder if you could say something
about what you mean by complexity.
And is that an assumption everybody else in the room
might share with you that I don't?
>> Okay. Oh-
>> And why it is,
what's the relationship between what you see as complexity and simple rules?
>> Okay. Yeah,
complexity means that there are too many things going on.
So I think most of us in our lives have too many remotes,
too many things our kids are doing, too many things to do at work.
So there's too many things to do is complexity.
And actually layered on it, which I didn't talk about, but
is even more a driver is uncertainty.
So not only are there many things to do and they're interconnected and
it's hard to figure out causality.
But also there's an underlying uncertainty.
And so not only is it complex, but it's changing.
And if you try to use a complicated solution,
lots of analysis, lots of information, there are two problems with that.
One is it's too slow.
The second is that you tend to over fit the past.
If you're using a lot of information you often will be over-fitting the past and
the past is not necessarily a predictor of the future in an uncertain world.
And so it's being driven both by the complexity as well as the uncertainty.
And so, for example, I'm now going to get a little bit techy here, but
if you have a big data set and you can figure out equations that fit that data.
The simplest fit of the data is the most predictive.
Not the most complex.
because what you're trying to do, is you're trying to predict the future.
Does that- >> Yes, that's very helpful.
And I guess my followup wold be,
is this why people talk about things like resilience within systems?
>> Oh yes.
>> Or that how complex systems are in fact more robust,
like a forest that has many species as opposed to one?
>> It does have to do with resilience.
That's right.
>> The ability to respond to all that uncertainty.
>> Right.
And I don't know how many of you the Santa Fe Institute and Complexity Theory.
The underlying scientific basis is complexity theory.
So if somebody wants to talk about that afterwards, I'm happy to do that.
Complexity theory, complex adaptive systems.
Yeah, question?
Thanks so much for the lecture, it was very interesting.
I have a very simple question.
>> Okay, I'll have a complex answer.
>> [LAUGH] >> Since we're here at Stanford,
what are the simple rules that the Stanford Admission Department uses?
>> [LAUGH] >> The simple rules,
I'm sure they have them and I'm sure they're not telling us.
>> [LAUGH] >> I could make a guess, but
I'm not sure I want that on tape.
[LAUGH] >> [LAUGH]
>> But I'm sure there are some.
>> Thank you. >> Welcome.
>> And unfortunately though it turns out we are turning down
a lot of great kids these days.
I don't know, it must be an enormously difficult task, because there are so
many great kids we're turning down.
Although as a professor every so often I'll have a student in class and
I'll wonder how did he or she ever get here.
Then I have to click back and
say what was I like when I was 19, oh yeah now I remember.
Yes?
>> Thank you for that.
Question is really about this concept of continuous improvement and
standardization.
>> Yes.
>> And of course the rule I see as being the plateau or
the standardization before you go through the next iteration.
How do you lead an organization through a continuous improvement process,
if you have rules that are established and
say the environment is constantly changing, how do you negotiate that?
>> I think what we find in working with companies, that you try to find.
The more the world is changing, the fewer the number of rules, and
that's the, if you will, the meta rule of thumb.
So if the world is slowing down and it's stable, you can have a lot of rules and
even you can start approaching bureaucracy.
But when the world is changing, you keep the number of rules simple, so
a smaller number.
Every so often, you do need to change the rules, the environments change, you know,
competitive situations change.
I mean, a classic case that many of you would know is Moneyball.
Moneyball, one of the key rules was higher,
signed players who have a high on base percentage.
Great rule until the Red Sox and every other team started doing the same thing.
That rule didn't work anymore.
You had to change the rule.
The environment changed.
So you do have to be sensitive to the number.
If you've got a lot of movement, and then when the competitive situation changes.
>> So once a year, maybe reassess or.
>> Reassess whether or not, are these rules making sense.
And I would guess many of you have, at some point in your life, raised teenagers.
>> [SOUND] >> Simples rules are perfect for
teenagers, but you have to keep updating them.
Simple rules, but as the child gets older you update the rules.
Yeah.
Great, thank you. Now I'll go on this side,
then go back to that side, yeah?
>> In most of the examples you gave,
it seemed that the simple rule was coming top down.
Is that a necessary precondition or did you find it the other way as well?
>> We found that bottom up was actually pretty useful.
In a lot of the companies where we're either, working with a small company,
let's say.
Not that small, but maybe 500 million and under.
Or business units of bigger companies.
It was more effective to have the individuals who are going to have to
use the rules be more involved with the rules.
Then they understood it, they had more ownership.
So it was actually more effective to go bottom up, using data from the past.
Okay, yeah?
>> And I come from a little bit more of a complex world.
I'm a general counsel of a company.
And what we find in our legal department, is that often times,
business units overlook exposures, which could be catastrophic.
Now there's a very small probability of them happening.
How do you integrate the probability of catastrophic exposures
in your rule making?
>> I haven't run into that very often.
I would think that one would, one would turn to perhaps someone like you and
perhaps operating people and say what are our biggest exposures?
Or what is this catastrophic risk?
And what's the one thing maybe we don't want to do?
Let me think.
It's not a catastrophic, but
I have worked with a company where they were doing a lot of joint ventures.
And they would always put a financial cap on the top.
We don't go in a venture that's bigger than this.
And that was a way to limit exposure.
As far as that real tail, I haven't thought too much about that.
I'll have to think about that.
Have you thought about it?
[LAUGH] >> Oh.
I know.
Your friend is rolling her eyes.
>> Yes, many times.
And I'll give you a classic example.
We recently opened up 26 locations, and
the legal department recommended putting a cap on the amount of
the lease exposure you could have if you had to exit the location.
All of the MBA said, we'll never get a lease if we do that.
And, of course, now some of the locations are underperforming,
and there are issues that are abound.
And which the legal department and
my department is having to deal with on an everyday basis.
[LAUGH] >> I guess the good news is you
still have a job?
>> [LAUGH] That's true.
>> Yeah. >> But,
it was a very good simple rule to start out with.
>> It was a good simple rule.
When do we get out of there?
>> [LAUGH] >> Yeah.
In the timing rules like the initial slide, it.
>> Yeah. >> Mentioned the timing rules can be
useful for getting unstuck.
And I was wondering if you've had examples of that?
>> Yeah, the idea is that.
That a lot of times we always mean to do something.
And if you have a timing rule that says well,
actually, I'm going to, I'll use actually, a personal example.
You know, I really should exercise more.
Which many of us probably have that dream.
If you actually have a time rule that says I'm going to exercise everyday at five, or
I'm going to exercise twice a week.
You put that into your head.
That is something you can remember.
That is something that becomes more concrete for you than GRI exercise.
So that is how it can get you unstuck.
Okay, I'm going to exercise every day at five.
I'm just going to do that for five minutes or whatever I'm going to do.
But creating that rule,
and one of the reasons why simple rules work us partty because they're fast.
But partly because they're easy to remember, and even when you're tired,
hungry, stressed, busy, you only have to remember a couple of things.
>> Thanks. >> Sure.
>> Hi. I had a question about the stop examples
that you gave for Steve Blane.
Start at the front end of making a decision whether you do something, but
you often have to stop projects which just aren't working.
>> Right, right. >> And as they,
since they're somewhere down the road, it's organizationally complex to do that.
So, it's sort of reversing bad.
How do you reverse bad decisions quickly
in a timely way in sort of simple rules that you may have seen relative to.
>> I"ve seen a company that was pretty successful into going into new businesses.
And their simple rule for
stopping was, if the business hasn't met certain revenue targets, and
they had pretty determined targets, >> In two years,
we either exit the business or this team at least exits the business.
And what that did was, everybody knew that's what the target was,
and so it wasn't then, at the last minute, people saying, oh, we're almost there.
We're almost there.
It ended at a certain time.
Maybe if I add to that.
Some companies have rules that it's better to fail inside the company
before you go out and find you're not performing well.
This might be in a product introduction.
Making a decision about stopping it there before you go through
all the full rollout of things.
So, it's even getting it back inside the company.
>> It's even to the point of, simple rules are situational.
In the situation you might find yourself, you may want to stop.
Let's say pharmaceuticals, somebody like Genentech,
I know has some rules about But when they stop a phase one clinical trial.
I mean, there are the FDA rules, but
they also have their own rules about when they stop a trial.
>> Thank you.
>> Okay, and if you have set them up ahead of time, it's a lot easier to then,
it becomes less political because everybody's agreed ahead of time,
this is the rule and we're following that.
It then doesn't become political around, well,
you know, maybe it's different this time.
Maybe this team's different.
You kind of know the rule.
Anything else on anybody's mind this morning?
Anything else?
Okay.
>> What simple rules could you apply to the complex problem of
humanity's unrestrained continued burning of fossil fuels?
>> Hm.
[LAUGH] That is a complex problem.
Simple rules are about a particular activity.
So simple rules could be useful for a particular thing like,
perhaps, automotive gas consumption.
In fact, I would think, this isn't climate change but it is a legal example, or
a government example, the Glass-Steagall Act that regulated Investment
banks and other kinds of banks in the 1930s is a 34-page law.
Dodd Frank with all its extensions is 34,000 pages.
A law that no one can understand.
No one will ever understand.
And the point is that for something like climate change,
having a zillion rules is just going to make, lawyers rich,
lobbyists rich and the rest of us confused and not knowing what to do.
And so relatively small number of rules, I would think,
would be helpful around let's say gas consumption or solar panels or whatever.
I mean, it would depend on particularly
what aspect of the challenge you were looking at.
But keeping the laws I think relatively simple so
that people understood them, businesses understood them so they knew how to
operate within the context of those laws, I think would be a big gain for us all.
>> Uh-huh.
And does it help to begin with a single vision perhaps.
Transforming the world's largest industry from 85% fossil to
100% renewables as quickly as we prudently and profitably can do so.
Something simple like that?
>> [LAUGH] >> I think it's going
to be something we're all, you know I think it's hard for us to all buy in.
I think maybe I'm a little less grandiose than that.
[LAUGH] >> Thank you.
>> Thank you. Thanks for coming.
Looks like we are about the end of our time but I can hangout.
Should I take one more question?
Okay.
>> Simple rules are wonderful.
My question is in terms of reality,
what happens when the people start to second guess the rule or
make exceptions to the rule or kind of
blink when it's time to [CROSSTALK] >> Well then you're not enforcing
the rules, but also maybe if a lot of people are blinking and
not enforcing it it's probably time to change the rules.
>> And do you see that?
>> Yes, the rule is not working anymore, people are finding too many exceptions.
Maybe there's something about these rules are obsolete, let's go to something new.
Okay?
Thanks everybody, I appreciate it, and have a great weekend!
>> [APPLAUSE]
[MUSIC]