The best rules are simple, flexible and purposeful, Stanford professor says
Stanford engineering Professor Kathleen Eisenhardt describes how lessons gleaned from the boardroom and beyond can affect every corner of our lives.
If Stanford scholar Kathleen Eisenhardt has learned anything over the years, it's that rules of thumb matter. They can prime you for success or doom you to failure. It all depends on what those rules are, how many you have and how you use them.
Rules, it turns out, have rules of their own.
Eisenhardt, a professor of management science and engineering, has gleaned scholarly insights from years of research into the strategies of entrepreneurial and established companies. She's also explored how groups behave under different types of rules.
Her insights are collected in a new book, Simple Rules: How to Thrive in a Complex World.
Eisenhardt employs a diverse toolkit to probe rules, from case studies to computational simulation models. With a small army of collaborators and graduate students, she has learned how rules can both help and hinder individuals, groups and organizations. Each study provides unique insight into the roles that rules of thumb play in making decisions and reaching goals.
From studies of the business world during the dot-com bubble, Eisenhardt learned how companies falter when they have either too many or too few rules.
"Companies that had too many rules were too structured – efficient at creating the wrong product," said Eisenhardt, who conducted these studies with former Stanford graduate student Shona Brown, now a senior vice president at Google. "Companies that had no rules just didn't get anything done."
Between these extremes were tales of success. Companies with the right number of rules had enough structure to develop products efficiently and sufficient flexibility to adapt in rapidly changing business settings. This relationship applies beyond product development and corporate growth.
Influence and insights
In its launch over four centuries ago, the Roman Catholic Church's Jesuit order operated with a small set of rules and guiding principles. These rules, Eisenhardt argues, infused the order's missions with enough structure and flexibility to help the Jesuits grow exponentially and globally while other orders stagnated.
But as Eisenhardt has discovered, the number of rules isn't the only factor in success. The rules also must serve specific purposes that help a group or business achieve its goals. This insight came in part from a laboratory study with former graduate student Gerardo Okhuysen in which multiple teams of five had to solve a fictitious food poisoning incident. Critically, teams were given specific rules to use as they tried to solve the food poisoning problem.
The rules had a major influence on each team's outcome. The best-performing teams excelled with a rule that encouraged team members to listen to one another. Surprisingly, teams given a rule to use their time efficiently also did reasonably well, even though they were under no time constraint. In both cases, Eisenhardt believes that the rules triggered effective behaviors.
"The rules shaped what the teams did," she said. "In both of these conditions, the rules seemed to trigger teams to pause and restrategize."
Teams with rules that did not promote this reflection were much less effective. Teams with no rules performed worst of all.
"Having the right rule of thumb is best, but just having some rule is usually better than no rule all," said Eisenhardt.
Working with former Stanford graduate student Chris Bingham, Eisenhardt also studied how different categories of rules helped entrepreneurs succeed in foreign markets. It was critical to success for these entrepreneurs to develop a variety of rules.
"The most effective entrepreneurs learned different types of rules as they went to different countries," Eisenhardt said.
Rules for timing and stopping were especially critical to their success. Eisenhardt cites legendary investor Gerald Loeb as an example. His simple rule was to sell when an investment lost 10 percent of its value. This rule helped him prosper and avoid steep losses during the 1929 stock market crash.
The simple lessons that Eisenhardt has gleaned from her research form the basis of Simple Rules. Along with co-author Donald Sull of the Massachusetts Institute of Technology, Eisenhardt draws on examples from the boardroom, government policies, sports, daily life, media and even nature to illustrate the power and promise of strategies built on simple, straightforward rules.
"We highlight why simple rules work and the six kinds of rules that really matter," Eisenhardt said. "We also offer insights into how to create better rules for personal and business situations, and how to change them."
While the book develops myriad examples of how simple rules have helped companies and individuals, Eisenhardt said that she and Sull do not prescribe a specific set of rules for everyone.
"We've come up with types of rules and a process for developing them," she said. "But your rules probably won't be the same as my rules."
For organizations or individuals, the key to effective rule-making is to understand the bottlenecks to achieving goals and develop simple rules to address them. This means that the best rules are often unique to the company or individual.
Netflix, for example, used its deep understanding of viewership habits accumulated from its streaming and DVD services to help develop rules surrounding its popular series House of Cards and Orange Is the New Black. In contrast, established media companies could not have used the Netflix rules.
Rules of thumb may vary by situation, but the roles they play in solving problems, coordinating teams and making better decisions are largely the same. That is a simple truth that Eisenhardt wants to share with a general audience in Simple Rules.
James Urton is an intern at Stanford News Service.