Chapter Three
In War, Risk Is Unavoidable

A POPULAR USE OF THE NINJA WAS TO INFILTRATE INTO WELL-DEFENDED castles or cities against which a frontal assault would have been useless or suicidal. A ninja would sneak in using a variety of methods (none involving a giant wooden horse) and engage in activities ranging from scouting the defenses and probing for weaknesses to setting fires to distract the defenders before an attack was launched.

These missions were obviously dangerous. No culture has ever looked kindly on enemy spies. Any ninja who managed to escape detection long enough to start a conflagration would soon find himself in the middle of a burning fortress that was under assault.

These warriors knew the risks they were taking, but they also knew what the potential rewards would be, for both themselves as individuals and for the cause they served. The understanding of this concept, combined with the ability to take big risks, underscores the definition of a modern ninja innovator.

Why Risk Matters

THINGS CHANGE, EVEN IF WE DON’T WANT THEM TO. NO COMPANY operating in the free market can be successful in perpetuity by delivering the same products with the same marketing and the same margins. While it is easy and natural to crave consistency and avoid risk, the changing nature of life and our environment requires us to change, to adapt, and to take chances in order to survive.

Taking risks does not mean being reckless or random. It means exploring options, assessing likelihoods, and making rational decisions. It means seeking feedback, actively listening, and weighing the consequences of any decision before pulling the trigger. A ninja should be self-aware and emotionally intelligent to understand these risks.

Americans actually benefit from a considerably lenient culture toward failure. As I wrote in the introduction, some of the most successful Americans in war, politics, and business were also spectacular failures. This doesn’t mean their contemporary opponents were forgiving. Indeed, there were several efforts to replace Washington as commander in chief of the Continental Army, just as Lincoln had his many detractors. Rather, the larger American public accepts failure much better than other countries. Other cultures, particularly Asian societies, have a strong tradition of avoiding shame. To bring shame upon oneself (through failure) is perhaps the worst thing that one can do. Indeed, avoiding shame is closely aligned with avoiding risk.

But in the United States, we value failure and call it experience. If you never fail at something, you are not risking enough. Few cultures are as accepting of failure and willing to view it as a positive. But, I would argue, the American view of failure is one of the principal traits that has led to our historical innovation dominance.

As for me, I am passionate about the value of failure. When I consider my life experiences, both professionally and personally, I can see that I have always learned the most when I have failed. It is now built into my DNA to evaluate any failure for “lessons learned.” Failures improve me. Successes are nice, but I fear too many victories without an intermittent loss can overinflate my ego and make me less likely to listen, or make me arrogant.

Not that I desire failure. In truth, I hate it as much as the next person. I try to avoid it. But I also don’t let it paralyze me. However, once I fall short, I give myself little time for wallowing in self-pity. I analyze what I have learned and I look toward the future. Early in my career, a human resources professional described me as “willing to take risks, but doing the research first.” I still think this is an apt description.

Each of us has an ego and a reputation. We put these at risk every time we try something new. I imagine plenty of good ideas are never acted on because we fear failure and value our reputations. Public failure is scary. But part of being a ninja is understanding that with mistakes come experience, so that even in failure, we gain.

People also tend to take fewer risks as they get older. Some even believe that starting a business is for the young. Indeed, Apple, Facebook, Google, and Microsoft were among the thousands of successful businesses started by founders under thirty. Earlier in life you may be risking only your own economic well-being. Later in life you may have a family and responsibilities to others. You also may have a certain lifestyle you do not want to risk.

In certain areas, I have taken on more risks as I have become older. For important issues, I have taken risks and become outspoken. For example, I feel strongly that our country is unfairly stealing from the next generation. I have spoken out loudly on this issue—even if it means criticizing prevailing leaders from both major American political parties. Yet, my risky forcefulness has paid dividends. I have found that while speaking truth to power may not endear you to it, it does gain you respect. My willingness to take a risk and speak out has landed me on various lists of influential policy people.

Now, this isn’t an invitation to put it all on red in a Las Vegas casino or buy an obscure penny stock. It is a call for you to explore and learn your own behavior and risk tolerance, and be willing to take a risk for something worthwhile and view failure, if that’s the result, as a learning experience.

Intel Inside

IF ONE THING DISTINGUISHES INTEL’S INNOVATIVE NINJA THINKING, it is their 1990s strategy of branding a semiconductor chip as a valuable feature that consumers would look for when they purchased a computer. The campaign’s two decades of ubiquity make us forget this now, but at the time it was an incredibly novel approach to marketing. People bought computers because of the software, the specs, or a friend’s recommendation. Who cared about who made some tiny chip inside the box that you couldn’t even see?

But with the proliferation of PCs, and with consumers at a loss in trying to figure out what made one better than the other, Intel saw an opportunity, and so it took a major risk. Intel’s leadership was convinced this was the way to grow market share, however, and the company invested hundreds of millions of dollars in the effort.

I first became aware of what they were doing in 1993, when I met with Intel executives to discuss their International CES participation. They described a plan for a remarkable exhibit at the show that year, a centerpiece of their effort to shift the image of Intel from that of a chip company to that of a producer of a coveted, brand-name product that stood for performance. The display Intel was planning was so elaborate that we actually had to work out a deal so they could occupy the same exhibit space they would be using at another show taking place a month and a half earlier.

The booth was a hit, and for several years Intel built on its success at CES by rolling out ever-larger, more elaborate and immersive exhibits showcasing the company’s cutting-edge technology. I will never forget being inside the “Intel experience” and feeling like I was touching the future. By using an amazing multimedia cascading exhibit, Intel managed to convey to me and others that Intel was way ahead of almost everyone else. You can’t get the same impression by reading a two-dimensional ad in a magazine or even watching a television commercial. Intel wisely used the live experience to change the very perception of its company, its products, and its importance.

Intel also cleverly used its CEO keynote and marketing around the show, including signage, publications, and live events, to ensure that every CES visitor knew about “Intel Inside.” Soon, consumers looked for that label before buying a computer, much in the same way that they look for the American Dental Association Seal of Acceptance when shopping for a toothpaste. By marketing itself in that way, Intel transformed into a brand known to millions of otherwise technology-illiterate consumers. Those consumers might not have known a motherboard from a mainframe, but they had “Intel Inside.”

The Intel marketing campaign taught me three things:

First, a clever company can create something out of almost nothing by thinking outside the box. Intel turned a chip into a brand and that brand into billions in added sales.

Second, Intel’s success demonstrated the power of trade shows to create an indelible live, interactive marketing experience. Intel captured the critical influencers who attended the trade show, including the media, retailers, and Wall Street. Intel’s marketing wizardry impressed upon them that the company was becoming not just another chip fabricator, but a brand in its own right.

Finally, Intel taught me the value of a visible CEO in enhancing and transforming the image of a company. Almost every other year, Intel CEO Craig Barrett delivered a keynote address at CES. (His successor, Paul Otellini, delivered the CES keynote in 2012.) Barrett used every second of his allotted sixty minutes to demonstrate how Intel “got” the future. More, I had the sense that Intel was at the center of the product offerings of so many other companies. The CEO would not only convey factual information about the company and its products, but also leave every audience member impressed by the importance and future of Intel.

Risk-Taking Starts with Belief

ONE OF THE BIGGEST REASONS INTEL WAS WILLING TO PUT ITS brand directly in front of consumers is because the company believed in itself. The company’s executives knew Intel had the best technology and manufacturing processes, and could back up its tremendous ad spend with performance.

Leaders of companies that believe in the future have a passion for what they are doing. They convey excitement, interest, desire, and a level of intensity that transcends the common, blasé tone that pervades much of society.

In my many years in the industry, I have had the chance to meet and work with many passionate leaders. I’ve been blown away by people like John Chambers of Cisco. Watching John work a room is a delight. He asks penetrating questions, feeds off the energy in the room, and shares his enthusiasm, interest, and excitement. I’ve seen him give speeches, brimming with energy as he dominates the stage, bubbling with enthusiasm for his presentation, and using his entire body to emphasize his main points. His passion moves his audience and transforms listeners into believers.

Amazon’s Jeff Bezos (see chapter 5) is another CEO who believes in his company and leads with passion. Jeff is not physically imposing; in fact, he wouldn’t be chosen first for any sports team. But what he lacks in physical presence, he makes up for with a confident presentation style that combines a self-effacing nature with a conviction that his path is the way to go, as unlikely as that might seem to whomever is in the room.

I will never forget two of Jeff’s talks to our group. In the mid-1990s—long before most people were even online—Jeff already knew how he would change the world. He described how Amazon would become a seller of choice of all products, starting with books. At the time, I recall believing him, based on a persuasive argument that was compellingly delivered.

Fast-forward a dozen years later when I again had a chance to hear him speak. Talking to our group in California, Jeff laid out a plan for a new type of book that could be read electronically. I recall my colleagues and I squirming a bit at the idea. After all, this was a guy who’d changed the world by delivering paper books—and this would be a totally new area for Amazon. The company had a massive infrastructure in place for shipping physical goods; now it would need to spin up a similar virtual warehouse for online content.

Of course, Jeff was right. I look forward to his next big idea. With his track record, experience, and passion, I’m sure it will be a winner.

It does take more than passion to be a worthy leader. For several years, Countrywide Financial’s Angelo Mozilo was everywhere touting his company and its mission of allowing every American to buy a home. Every time he would appear, my wife would tell me she didn’t trust him. Turns out she was right. Countrywide made millions of loans to unqualified home buyers and helped cause the real estate crash that almost brought down the world’s economy.

France’s “Defensive Strategy”

MOVING ACROSS THE OCEAN, WE CAN LOOK AT A CULTURE THAT does not value risk. France is a strong, rich country, with the world’s fifth-largest economy as measured by GDP. More than eighty million annual visitors make it the most-traveled-to country in the world.

France’s core strength is that it is a sensuous country. It excels in grabbing, shaping, and enhancing each of the five senses. Its wonderful wines and food cooked magnificently thrill the palate. Its perfumes, gardens, luxury goods, and cuisine delight our olfactory senses. The French language, with its curves and smoothness, seduces the ear. Dozens of words we use in cooking, food, and restaurants are actually French words.

France is also visually enchanting. It’s not only the couture fashions and thousands of delightful shops that attract the beautiful, the well dressed, and the elegant. It’s also the bustling but sophisticated French streets and the entire French culture. The museums, especially the Louvre, burst with incredible classics of art. The magnificent country contains charming towns and pastoral settings that inspire both desire and contentment. France’s rich visual display is a vital part of the allure of the millions who visit France.

So as a sensual culture with income that derives significantly from food, fashion, and foreigners, how does France innovate and grow its country? It has a strategy based on its strengths, but its efforts to build up barriers to protect its language, culture, government, and increasingly dysfunctional workforce threaten its success.

Like many countries, France learned the wrong lessons from the First World War. As war with Nazi Germany approached, France’s generals expected that conflict to look much like the last one had—a defensive struggle where gains would be measured in feet and a well-fortified army could hold out for years until help arrived. France applied these lessons toward the creation of the Maginot Line, a massive system of interconnected fortifications along its border with Germany.

The French strategy was defensive. It built an impenetrable wall and dared the Germans to cross it. The Germans took one look at the Maginot Line and said to themselves, “The French are right. It is impenetrable. So we’ll just go around it.”

That’s because the Germans had learned entirely different lessons from the First World War, and the innovative new doctrine of blitzkrieg—or lightning war—combined with an attack through Belgium exposed the Maginot Line as being entirely unsuited for the modern way of war.

Blessed with an amazingly rich cultural heritage, the French are again trying to erect a Maginot Line of sorts to protect what they hold most dear. Unfortunately for the French, there is little hope that this new wall will work any better than the last one.

Start with language. For hundreds of years, the French language was the tongue of European diplomacy. A far-flung colonial empire expanded the language’s reach to the rest of the world. Even today, it remains an official language in twenty-nine countries, with a majority of the world’s French speakers living in Africa.

Yet French long ago ceded its dominance to English, which has become the global language of business, science, music, movies, and air traffic. Close behind are the huge number of speakers of the various dialects of Chinese, Spanish, Hindi-Urdu, and Arabic.

The French language has lost its prominence, but the French stubbornly defend it from outside influence. The French agency L’Académie Française, first founded in 1635, is the official custodian of the French language. It is entrusted with writing the official French dictionary and even though its dictums are not legally binding, the very existence of the body reflects the disturbing French habit of playing defense. For instance, in 2011, the agency set up a website that would list “blacklisted” words that had crept into common French usage. A report in the Telegraph (UK) said:

Agnès Oster, secretary of the body’s dictionary commission, told The Daily Telegraph that more English terms would be added to its online blacklist every month.

November’s additions will include the franglais term “supporter” to mean “support” (a team, for example). It suggests replacing it by “soutenir” or “encourager.”

It will also urge French-speakers to drop Anglicised superlatives like “top,” “must,” or “hyper” using instead proper French terms like “incomparable,” “très bien,” or “inégalable.”

It also hopes to wean them off the cinema term “casting” and replace it with “passer une audition.”1

Unwilling to change, the French view this as a defense of their cultural heritage. Indeed, there is considerable support in the United States to make English the official language. But this is more symbolic than anything else. Most Americans would laugh at any government attempt to stop the natural evolution of language, which, like biological evolution, is impossible to prevent.

Here again we can draw a distinction between the French people (plenty of ninjas) and their government (not so much). While the French government stubbornly sticks to its “protect French” mantra, the more ninja-esque business community has figured out that it must be flexible.

As the Chinese economy has boomed, more and more Chinese tourists have come to see the amazing sights of France. Near the world-famous Louvre in Paris sits the famous French store the Galeries Lafayette. Spend some time sitting nearby and you’ll quickly notice bus after bus full of Chinese tourists arriving to check out the wares. The store has responded to this demand by hiring employees who speak Chinese. According to store personnel, half of their four hundred sales employees now speak Chinese, to better serve the tourists who now make up the largest segment of its customer base. (Americans rank fifth behind Russians, other Europeans, and Arabs.) The average Chinese tourist at the store spends over €5,000 (nearly $7,000)!

Other Parisian retailers also are scooping up Chinese cash. On a recent trip to Paris, my wife witnessed a line outside the Louis Vuitton store near the Galeries Lafayette. The store has started using a velvet rope to manage the mostly Chinese crowds wanting to shop there.

The lesson is clear: Businesses will adapt, even in France, if the government doesn’t get in the way. Some important changes France should make:

First, abandon the extreme protection of the French language. English is the new number one language. A monolingual populace will hurt French primacy as a destination for tourism and visitors.

Second, stop protecting French culture by mandating the domestic content of television and radio. France has isolated itself and hindered growth by walling off international competitors and restricting outside access to French movies and music. The country has uniquely enacted strange laws protecting “moral rights” of content creators—which allow a creator to always have some say over his work regardless of who owns it—and its “three strikes” law disenfranchises consumers of content. These restrictions prevent many French artists from breaking into global awareness. It also stifles competition that would improve the domestic film and music sectors in France and help turn content creation into a major national export.

Third, do something about the antiquated, job-killing labor laws. The French, like the rest of the European Union (EU), suffer from a lack of work commitment, as reflected in their laws setting mandatory minimum vacation days. EU laws require a minimum of twenty paid days of vacation per year, not including national holidays, and EU-mandated weekends, breaks, and time off for night workers. More, the EU in 2012 even ruled that workers who get sick on vacation days are entitled to an equal amount of additional days off.

But France goes farther than these already generous mandates. The workweek, by law, is set at thirty-five hours per week. Anyone who works thirty-nine hours per week gets an additional ten days of paid leave each year. With such generous holidays and mandatory leave benefits, it is not clear why French workers so frequently strike. Almost every time I have been in France, some major strike affected my travel plans. This work attitude eventually will also hurt France’s core strength of attracting visitors. Most travelers do not have great flexibility in arriving and departing and cannot be held up for days due to striking workers. People understand weather issues, but they resent strikes.

These types of mandates, with the guarantee of lifetime employment and laws that make it very expensive for companies to fire employees once hired, make France a less desirable location for business investment. So unless France changes its attitude toward employers, it will remain a wonderful place to visit, but not a great place to create jobs.

Back Off the Internet

THE FRENCH ARE CERTAINLY CAPABLE OF INNOVATION IN TECHNOLOGY, as proven by the Concorde, Renault, and especially the country’s successful nuclear program. More than three-fourths of the energy produced in France is derived from nuclear power, and the country is at the forefront in developing next-generation reactor designs and the recycling of spent fuel.2

Despite these successes, overall France has a terrible record of trying to anticipate technology and pick winners and losers. (In fact, every country does; some just try it more often than others.) The government of François Mitterrand nationalized the Thomson-Brandt consumer electronics company in 1982.3 Five years later, the company acquired the already declining American company RCA for approximately $1.1 billion in cash and other considerations.4 Thomson then sank another $1 billion into a turnaround plan.5

In the face of continuing losses, France looked to China for help, forming a joint venture with TCL in 2004. Just three years later, after TCL had taken a $680 million loss on its new European operations, TCL closed things down.6 Thomson ended up selling off the RCA audio/video and accessories brand for only $50 million.7

Unfortunately, the French government has not learned from past mistakes. In May 2011, then-president Nicolas Sarkozy addressed more than eight hundred top technology executives assembled at the eG8 conference in Paris regarding his proposals for increased government involvement and control over the Internet.

Sarkozy began by describing the Internet in grand terms as “a new form of civilization” and “the third globalization.”8 However, he then made clear his view that this new civilization could use a lot more civilizing. He insisted that governments must dramatically increase regulation of the Internet to protect intellectual property, children, privacy, and security, and to ward off monopolies. He wanted to push this innovation-smothering approach onto other countries, and he was asking this crowd for support.

I was at that summit and can report that these remarks did not go over well among an audience that included influential business leaders like Jeff Bezos of Amazon, Eric Schmidt of Google, and Mark Zuckerberg of Facebook. One questioner from the United States said the Internet was the “eighth continent” and governments should follow the example set by the Hippocratic Oath and “first do no harm.” The comment elicited strong applause and forced Sarkozy to defend and repeat his vision of why governments must regulate the Internet.

We expect to see calls for censorship from regimes that govern without the consent of their people. It’s shocking, however, to see a democratically elected leader calling for worldwide regulation of the Internet. And it was downright thrilling to see the American innovation community pushing back that day with questions, applause for the questioners, and a press conference.

The American approach—with the Internet open for innovation and a force for freedom—won the audience. The crowd recognized that the Sarkozy proposal, whatever its motivations, threatened the very openness that has fostered two decades and counting of blisteringly fast innovation.

Too much is at stake for America and the world to allow the Internet to be constricted by old government’s quest to control content. As Google’s Schmidt has argued, the men and women on the leading edge of technological innovation are smart enough to see the potential problems, and innovation itself will do a much more effective job at addressing potential problems than behind-the-curve government regulators could ever hope to do themselves. Our president and Congress must lead the nation and the world by resisting these calls to regulate the Internet.

In a panel discussion that took place after President Sarkozy’s remarks, Schmidt and eBay CEO John Donahoe agreed that government’s role is to provide citizens with Internet access, not to regulate content. Sadly, not all were convinced, as it fell to then–French finance minister and future International Monetary Fund managing director Christine Lagarde to defend Sarkozy’s position, insisting that a lack of regulation would spell “chaos.”

Overconfidence Is a Weakness

I INCLUDED THE FRENCH APPROACH TO THE ECONOMY IN THIS chapter on risk because it’s an example of a strategy that includes no risk whatsoever. In fact, the French strategy, like the Maginot Line, is all about containment—keeping what they have. And the foundation of all defensive/containment strategies is a lack of confidence in your ability to compete in the marketplace. It’s the siren song that few dying industries and companies can ignore. But it’s also a surefire way to lose the very thing you’re trying to save. For all its delights, France is in danger of becoming a theme park for tourists—much like Italy is already: a tourist attraction where visitors behold a once-great society.

But this is not to say that all risk is good. Taking foolish chances, for example, can put you in just as much trouble as taking no risk at all. Rather, the ninja company takes calculated risks. For every time a company bet the farm and won, there are hundreds of examples of failure. And the springboard for taking that foolish risk is usually overconfidence. A ninja might have great confidence in his skills. He might even be a bit cocky. But there’s a sea of difference between the ninja who tries to take on an army because he believes he’s invincible and the ninja who chooses to flee to fight another day.

In a country like ours that rewards risk and accepts failures, tech entrepreneurs are almost universally celebrated. Among Democrats and Republicans alike, you’re probably not going to hear, “Well, the problem is that we have too many tech entrepreneurs,” on Meet the Press. Even in this world of gross economic ignorance, it’s generally recognized that entrepreneurs’ enthusiasm for risk-taking is an essential driver of innovation and economic growth. And tech entrepreneurs wear their risk-taking credentials as badges of honor.

That’s why it’s sobering to imagine that what really drives entrepreneurs is not a virtue but a usually fatal character flaw. A flaw known as overconfidence.

According to a 2003 scholarly paper, “Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence”:

Launching a company is a risky business, with about half of all newly created companies folding within four years of their creation. It would therefore seem that entrepreneurs are world-class risk-takers.

However, what drives entrepreneurs to launch companies is not their attitudes toward risk but their perception of risk, say management scholars and psychologists. Simply put, many entrepreneurs overestimate their odds of success.9

This is the conclusion of researchers Augustin Landier, an assistant professor at the University of Chicago’s Booth School of Business, and David Thesmar, member of ENSAE, a prestigious French research organization. The study used data from about twenty-three thousand French companies to examine entrepreneurial optimism and its effect on capital structure and performance. The paper is directed at investors as a warning about the mind-set of most entrepreneurs, but I think it’s also useful for our discussion here.

Landier and Thesmar looked at the differences between entrepreneurs and professional investors in their beliefs about new business ventures. Needless to say, there was quite a gap between their respective perceptions of risk, to the detriment of entrepreneurs.

Figuratively putting entrepreneurs on their analyst’s couch, Landier and Thesmar tried to determine the characteristics of entrepreneurs most related to their overoptimism. Among their more provocative findings:

• As educational level and career experience increase, entrepreneurs are more prone to overoptimism. Because entrepreneurs must possess strong positive feelings about their ventures to put aside excellent jobs elsewhere, those who have more education and experience are likely to be more optimistic.

• Optimistic entrepreneurs aren’t likely to abandon their dreams quickly or easily. Even if it becomes apparent that their business will not succeed without abandoning some portion of the business plan, adapting it, or scaling back the business, optimistic entrepreneurs’ strong beliefs in their venture may prevent them from adapting to early feedback.

• Optimistic entrepreneurs believe the financial markets underestimate the potential of their ideas. Therefore, they prefer to use as much of their own and their family’s wealth as possible [to finance their venture].10

Through painful experience—be it institutional or personal—professional investors know they will repeatedly encounter all the above (and more) in their relationships with overoptimistic entrepreneurs. It’s one of the reasons that it’s an article of faith among professional investors that there are more good technologies than there are good entrepreneurs or investment opportunities.

In fact, it’s probably also an article of faith that professional investors’ Holy Grail investment opportunity is a technology that doesn’t depend at all on the foibles of imperfect humans for its success. But as long as business success depends on the skills of a management team (see chapter 2), investors will always view the brash, overconfident tech entrepreneur with the “can’t lose” product with a healthy degree of skepticism.

What does all this mean to ninja innovators? For starters, it’s another warning that the life you have chosen is incredibly difficult and treacherous, no matter what the size of your dreams and ambitions is. Just as having the best idea in the room isn’t enough, simply taking a risk isn’t enough, either. Like the ninjas of feudal Japan, whose skills were developed and perfected over years of intense study and training, today’s innovator needs so much more than a product and a “damn the torpedoes” spirit to succeed.

As George S. Patton, someone who knew a lot about risk, once said, “Take calculated risks. That is quite different from being rash.”