Jim Clifton, Â鶹´«Ã½AV's chairman and CEO, says businesses have, in most cases, maximized every possible benefit from practices based on neoclassical economics, such as Six Sigma, reengineering, and total quality management. The significant competitive advantages from these practices have hit a point of diminishing returns, he adds. Most well-run companies have wrung almost every efficiency they can from their operations -- and their competitors have too. So have we reached the end? Are there no worlds left to conquer?
In America, Europe, Japan, most of the benefits have been squeezed out of process improvement and neoclassical economics.
Hardly, Clifton says. There are vast new business frontiers left unexplored. Clifton points to revelations that behavioral economists are uncovering -- starting with the discovery that human decision making is more emotional than rational. This upends a core assumption of neoclassical economic theory: that consumers can be counted on to always make rational decisions about the products and services they buy. It also opens up a vast new area for business to explore and exploit -- and Clifton has staked his company on the fast-developing leadership science within behavioral economics.
In the new normal, says Clifton, the old ways of doing business won't work anymore. The men and women who will conquer this new world will be the ones who best understand their constituencies' state of mind. And state of mind is everything that matters to leadership: talent, innovation, entrepreneurship, creativity, optimism, determination, and all the other things that create economic growth.
This next generation of business, civic, political, and religious leaders, as well as social entrepreneurs, will understand their constituents' state of mind and the capacity to quantify it better than their predecessors did. And those leaders will be uniquely poised to do a very important thing: By understanding the state of mind of their constituencies, those leaders can use that knowledge to create real economic growth -- and more good jobs. That will make them, as Clifton says, the ones who lead the world.
GMJ: Before you talk about the next generation of leadership, what was the last generation of leadership?
Jim Clifton: Process improvement was the last big leadership evolution. General Electric's leadership is a good example -- they did Six Sigma perfectly. Jack Welch was the king of process innovation. But when Jeff Immelt took over, he had a problem -- there was nothing left for him to Six Sigma.
That's true for everybody. In America, Europe, Japan, most of the benefits have been squeezed out of process improvement and neoclassical economics. That's one of the problems Wall Street is facing -- investors have exactly the same data and methodology from neoclassical economics, but it no longer differentiates anything.
I'm not shortchanging neoclassical economics; that and process improvements worked really well for a while. Why did Japan rise up out of nowhere to dominate the world? Well, one big reason was the influence of quality guru Dr. Edwards Deming. He led with his next-generation leadership idea, and Japan seized on it first. It worked. Implementing that kind of thinking was very good for our company too. We immediately made more money; we immediately were more productive.
Now companies are structured to do a magnificent job with that kind of data. But it's absolutely not enough anymore. There hasn't been a big idea for leadership in 25 years, nothing that shows the huge sweet spots and pushes the big advancements.
Now we need the next generation of leadership, because we've maxed out everything else. And the jungle is more dangerous -- and a different kind of dangerous -- than it used to be.
GMJ: How is the business jungle more dangerous? And what should the next generation of leaders know?
Clifton: Quality and price don't matter as much. And if you're staking your business on them, you're in danger. With globalization, almost everything can be made just as well or more cheaply somewhere else. We may feel sorry for the lug nut manufacturers whose jobs are being outsourced. But the other side of globalization is that heart surgeries cost a fraction as much -- and are just as good -- in Mumbai as they are in big U.S. cities. Excellent quality has become the point of entry in most markets, and someone can usually deliver at the same or better price point and level of excellence.
Leaders need to understand the will of their constituencies: their will to work, their will to live, their will to revolt, their will to follow.
Meanwhile, there aren't many competitive advantages left in process improvement. People have done everything they can do with neoclassical economics. You can lean-management, Six Sigma, and TQM your company to death.
The next evolution of leadership requires a change. The next evolution of leadership, the next big idea, will be leading with an in-depth understanding of states of mind rather than with an in-depth understanding of financial statements. That's where the low-hanging fruit is.
Innovation, talent, and entrepreneurship are what matter most to leaders now. Those are the areas new leadership must master, because those are the areas that will drive growth in the new economy.
GMJ: What do you mean by "states of mind"?
Clifton: The most basic state of mind that leaders need to understand is the will of their constituencies: their will to work, their will to live, their will to revolt, their will to follow you. Another element of state of mind is emotional affect: how much stress your constituency feels about money, about trying to get to work, about their relationship with their boss.
You have to nail states of mind because everything important, everything human, comes down to states of mind. The leader who is the best at mathematically describing states of mind will be the one who wins.
GMJ: Explain what you mean by "mathematically describing states of mind."
Clifton: Trying to answer that question is what got us interested in what Nobel Prize-winning psychologist Daniel Kahneman and Richard Thaler, Angus Deaton, and the rest of those super-smart economists were doing with behavioral economics. The science of behavioral economics describes how human beings make decisions and how that affects their behavior.
But you can't apply behavioral economics until you can go beyond anecdotally describing human behavior to mathematically describing it. You can't just talk about what you see or experience personally and anecdotally -- you have to quantify it if it's of any use or value.
GMJ: So why will leaders who can quantify states of mind be the winners in this new world?
Clifton: Because those leaders will be the ones with the information -- the data -- that's needed to solve the world's biggest problems. Here's an example: Many people think money is the solution to every problem. Problems like education, security, job creation, and well-being can be solved, but leaders are using the wrong tools to solve them. Mostly, they're just throwing money at them. Leaders can double productivity if they spend enough on it, but it's not sustainable. Eventually, they run out of things to spend money on -- or money to spend -- and improvement stops, then starts trending down.
In the world we're competing in now, solving problems isn't about spending money. It's about understanding and managing ideas and talent -- and states of mind. That's where the new leadership breakthroughs will be. Leaders who can quantify states of mind and make decisions about their constituencies based on that information are the ones who will lead the world.
Your constituency is whomever you're leading -- your company, your city, your country. Or it's a group you're tracking and keeping an eye on -- at an extreme, say, the people hanging around a terrorist training camp in Kandahar. And this matters because . . . well, look at it this way: If you go to the U.S. State Department and ask them if political radicalization is growing or decreasing -- because that is what causes terrorism to thrive -- you'll find they don't know. That's because they can't mathematically describe it. If you can't quantify it, you can't understand it.
GMJ: What's the value of mathematically describing states of mind?
Clifton: If you can quantify states of mind, you can better understand the emotions that cause behavior. Knowing those causes helps leaders change behavior. It also shows you where you're wrong. If you're making decisions without understanding what your constituency is thinking, you're going to make bad decisions.
Remember, in the global marketplace, you can get anything from anywhere at the price you want -- or close to it. And that negates competition based on price or quality.
Here's a big example: Remember when everyone thought Middle Eastern Muslims hated Western freedoms? That's dead wrong, according to our research. Freedom is one of the things they admire most about the West. It's the politics they don't like.
This new kind of leadership is an algorithm, a step-by-step process, and you have to get the first step right or you will get everything that follows wrong. That's why you must quantify states of mind before you act. If you make decisions based on assumptions rather than data, you'll only make things worse. And leaders must be able to understand human nature, the states of mind prevailing in the constituency that they're creating strategies for. If they don't, they'll make mistakes.
GMJ: Do you need direct access to people to affect states of mind?
Clifton: Well, for better or worse, you can affect the states of mind of people you've never met. And there's a real danger in that. Everybody now can know everything about everyone -- thanks to things like YouTube, Twitter, etc. -- and that's fairly new. When I grew up, my only access to the world was my bike. My neighborhood was a little rough -- I went to the kind of junior high where eighth graders smoked and girls had fistfights -- and while riding my bike, I noticed that my house was slightly nicer than everyone else's. I concluded that my dad was the richest guy in the world.
Then, my dad took me with him when he stopped to visit a city father at his home. The man had a swimming pool. I hadn't realized that people could have their own swimming pools. I don't think I've ever gotten over that -- I had envy blown into every cell of my body. That moment is what billions of people experience all the time. Now, everyone thinks that in America we all live like that city father because that's what they see on the Internet.
GMJ: That's the political angle. What's the business value of quantifying states of mind?
Clifton: Remember, in the global marketplace, you can get anything from anywhere at the price you want -- or close to it. And that negates competition based on price or quality, and it makes states of mind much more important. It raises the bar on understanding how and why people behave the way they do.
GMJ: Such as workers and customers?
Clifton: Exactly. When leaders have choices to make, they can't base them solely on price or quality. They now must make decisions based on their workers' and customers' states of mind. In the old days, a business leader could be really successful by mastering accounting. Nothing works without perfect accounting, of course, but accounting is not a leader's job anymore. Leaders have to push that function to their staff.
Now leaders need to calibrate their strategies not just against the old neoclassical economic data but also against a new institution of behavioral economic data that quantifies the role of human nature in their constituencies. This requires a whole new way to lead.
GMJ: Quantifying your customers' states of mind seems difficult and expensive. Isn't it cheaper and easier just to create their state of mind through marketing?
Clifton: Well, that's another big change with leadership. It wasn't long ago when you could buy customer constituencies with advertising. A $100 million ad campaign would work. That's a lot harder to do now because information overload just overwhelms us.
In the United States, it wasn't that long ago that we had just three TV channels, and we all watched Walter Cronkite on the news in the evening, and that's what everybody talked about the next day. But now you have hundreds of cable channels and the Internet, YouTube, etc. -- and your ad campaign gets buried by all the other stuff out there. All that makes innovation more important. Innovation means you have to beat everybody with a better idea because that's worth more than money.
But of course talent is key to innovation. The way I see it, talent is being able to do something significantly better than at least 10,000 other people. You need to be at least one in 10,000 to have talent. If someone were to ask me how to survive in the new world, I'd say find your strengths, then your passion. That's your assignment. You'll be one in 10,000 with just that. Then find which single thing you can become arguably the best at in the world, some niche that you can own. Leaders want the workers in their constituency to be one in 10,000. But their best have to be one in a million.
It costs less for a country to have citizens with high well-being because they're healthier, more productive, earn more, and they're more philanthropic.
GMJ: That's a lot of complicated things for businesses -- or governments, for that matter -- to measure.
Clifton: Yes. But no matter what you want to know about -- whether it's talent, leadership, economics, corruption, law and order, war, anything -- Â鶹´«Ã½AV can hang a number on it, with our polling, our well-being research, our employee and customer engagement assessments, our Clifton StrengthsFinder talent assessment. Unless you hang a number on something, leaders -- whether they're in business or in government -- may not end up addressing their constituencies' needs by making decisions without solid data on their states of mind. And if they don't address their constituencies' needs, they will fail at making policy, and they won't change anything.
GMJ: When does policy succeed?
Clifton: Policy succeeds when the outcome is quality GDP growth. I know that sounds impersonal and materialistic, but the ultimate touchdown for your country, city, and company is quality growth.
For a country, quality growth means growth in GDP -- and that means creating good jobs, future-oriented jobs. Get the good jobs where you live. And that means don't put up protectionist walls to keep lug-nut manufacturing jobs in your country. What you want to generate are all kinds of invention jobs, innovation jobs, and education and advice jobs. Quality growth for an organization is organic growth created by original ideas and magnificent entrepreneurship, rather than growth that comes from a wide variety of financial manipulations, including acquisitions.
Leaders also need policies that create higher well-being for individual citizens. It costs less for a country to have citizens with high well-being because they're healthier, more productive, earn more, and they're more philanthropic. That's how you maintain leadership of the free world.
GMJ: How, ultimately, will behavioral economics data benefit leaders?
Clifton: At Â鶹´«Ã½AV, we're creating the biggest, most current institution of behavioral economic data in the world. Our most comprehensive database covers the workplace, and we are building the world's most comprehensive database on global well-being data. We want to build the biggest and best database of behavioral economic science. That's of value to leaders because when they tell us who their constituency is, we'll help them build an institution of data so they can help their people thrive by creating a sustainable culture.
If you're a leader, you need access to this new institution of data that sits next to your current neoclassical economic model, and that's what Â鶹´«Ã½AV is in business to do. We can help you answer your toughest questions: what's the barrier to your city's quality growth; whether your healthcare policy can be effective; whether your group has the talent to do what you want; what's undermining your productivity; what's driving America's high school dropout rate; how you can dramatically reduce suffering; how to prevent the wars of the future.
Do you have any other questions?
GMJ: Well, yes. What's the meaning of life?
Clifton: The meaning of life is to build as much as you can, then die.
GMJ: I was kidding.
Clifton: I wasn't.
-- Interviewed by Jennifer Robison