(Published originally on the Harvard Business Review Blog.)

Google has reached a pivotal moment in its history. What can it do to expand beyond its incredible core business, which is now reaching a more mature phase? For insight on how it can develop, let’s look to Pixar.

Pixar is as close to a constant learning organization as there is, with a proven ability to reinvent and a genuine cultural humility. Google’s founders could learn from Pixar’s founder and president Ed Catmull’s prolonged and determined efforts to counter the natural human reactions to success by aspiring to proactively (and honestly) seek-out and solve new problems constantly, recognizing that he doesn’t have all the answers on his own.

Despite an unbroken string of 11 blockbuster films, Catmull regularly says, “Success hides problems.” It’s an insight Google should acknowledge and act on. Google’s leadership admirably tolerates failure on side-projects (and big projects as well), but what Pixar has that Google does not is a culture where the fear of complacency is a strong motivator, where new problems are identified, discussed, and addressed openly and honestly, all of which requires humility.

As David Price describes in his superb The Pixar Touch, Pixar began its life as a computer hardware company. Price writes that Steve Jobs never expected Pixar to be a film company when he bought the company from George Lucas in 1986. Pixar was then the 45-person computer graphics group of Lucasfilms, led by Catmull, whose dream since graduate school had been to make a full-length digitally animated film. The group had developed the Pixar Image Computer, a computer graphics machine that produced high-end visual imaging (such as for MRIs). Jobs thought the technology had breakout potential when he bought it, yet the Pixar Image Computer never found a market.

Jobs also shrewdly allowed a tiny animation division, led by John Lasseter, a former animator from Disney, to make little bets on short animated films (and, later, TV commercials). Shorts would become the company’s vehicle to build the technical and storytelling expertise, as well as the credibility necessary to ultimately coproduce (with Disney) Toy Story in 1995, the first digitally animated feature film.

The 1980s were difficult for Pixar. Steve Jobs deserves enormous credit for his role in funding and driving the company. But, despite Pixar’s small wins with short films, success was far from guaranteed. During this period, Catmull was puzzled by why so many successful companies ultimately failed. “I’m thinking, ‘If we’re ever successful, how do I keep from falling into the traps these companies are falling into?” he recalled in a recent lecture at Stanford Business School.

Catmull watched as companies like Evans & Sutherland, a pioneering computer graphics company, and Silicon Graphics lost their lead. Like Google today, those companies had access to great talent and problems, yet somehow lost their edge and market lead. He studied Toyota the most. Today, Catmull sets the tone for a company culture that is unusually open and honest, resembling Toyota’s aspiration of constant improvement. (Toyota’s current challenges aside, Amazon’s Jeff Bezos is another serious student of Toyota and its processes). Catmull constantly and proactively solicits feedback from Pixar employees, who say that the mentality of constant improvement flows throughout the company.

Ed Catmull (source: Pixar)

As with Toyota’s methods, what interests Catmull the most, and appears to motivate his actions, is to constantly identify and solve new problems. When Catmull gives a public speech or lecture, what’s most noticeable is that he talks about the problems that Pixar has encountered and the mistakes that he has made. Pixar has, for example, nearly burned-out its employees on numerous occasions. Like every organization, there are also pockets of the company that are extremely resistant to change.

Catmull freely acknowledges through his words and deeds that doesn’t know what he doesn’t know. When delivering a lecture at Stanford’s Computer Science department in April, he compared trying to build a successful lasting company to a constant iterative creative process. “There is a lot about this process which I find mystifying still,” he said, “There’s certain things that I think we’ve got right and certain things we’ve got wrong.”

Outsiders are routinely surprised by Pixar’s cultural honesty and willingness to be challenged. When Stanford professors Robert Sutton and Hayagreeva “Huggy” Rao interviewed Pixar director Brad Bird with Allen Webb, Bird recounted being recruited to Pixar:

“Steve Jobs, Ed Catmull, and John Lasseter said, in effect, ‘The only thing we’re afraid of is complacency, feeling like we have it all figured out. We want you to come shake things up. We will give you a good argument if we think what you’re doing doesn’t make sense, but if you can convince us, we’ll do things a different way.’ For a company that has had nothing but success to invite a guy who had just come off a failure and say, ‘Go ahead, mess with our heads, shake it up.’ When do you run into that?”

Ed Catmull and Pixar have the potential to one-day be the Toyota of American business, a role model for building a constant learning organization. It’s a striking model for Google. What do you think? Is Pixar a good role model company for Google and its founders these days? What advice would you give Google executives at this pivotal inflection point?

In late April, JP Morgan unexpectedly invited me to a “thought leaders dinner” to discuss the latest goings on in Silicon Valley and digital media. In a private room at the San Francisco restaurant Kokkari, there were about 20 of us seated around a long rectangular table, including venture capitalists from prominent firms, successful entrepreneurs, and a handful of people from J.P. Morgan, including Jimmy Lee, the firm’s well-known Vice Chairman, who sat at the head of the table. (I was, like Kevin Costner’s character in Bull Durham Crash Davis, “the player to be named later.”)

Anyhow, after about an hour and a few glasses wine, Jimmy raised the main question he was curious about: “I want to know from each of you: which company would you go long on and which would you short?” We could pick any timeframe. And, as it turned out, while the long picks varied widely from Amazon to Yahoo!, 12 of the 15 ‘thought leaders’ shorted Google. Jimmy was surprised, virtually astounded: “Wow!” he exclaimed, “You guys are really negative on Google, huh?”

I, too, was surprised. Google has been, after all, the most successful company in recent history (in terms of churning out growth and profits), led by Eric Schmidt, a well-respected CEO. And, we’ve seen book after book about why everyone should be more like Google. I admire Google, its people, and what they have been able to accomplish enormously. It’s astonishing. But the opinions in that room were not based on the company’s past performance. They were based on insights about Google’s future. Below are the reasons people cited for shorting the company (which, interestingly, were fairly diverse):

–Google has experienced a severe talent drain over the past several years, losing some of its most entrepreneurial and innovative people. Although Google’s has high retention rates, Google’s talent challenge is not in terms of numbers, it’s the type of people who are leaving and why they are leaving. The talent drain from Google has been well documented. Venture capitalists in the room (without a vested interest in the companies) argued that Facebook and Zynga are currently considered hot places to work in Silicon Valley. Google has, for example, seen a stream of people leave for Facebook including, more recently, the likes of Erick Tseng, the senior product manager of Android, Google’s critically important mobile initiative.People close go Google say upward management is slowly replacing the company’s early culture of innovation. Entrepreneurial types and thought leaders who feel confined or unmotivated are moving. People will even say that it reminds them of Yahoo back in 2004-2005, not the meritocracy they once joined.

–The company has run out of easy growth opportunities and must now find big chunks of new revenue. With the core search business maturing, Google increasingly seems to increasingly feel the need to make some “big bets.” That is a problem that maturing companies face that CEOs call “the tyranny of large numbers.” Even mobile search, which is seeing impressive growth numbers of a small base, is still too small to make a material difference for the company. The company is obviously trying like crazy to find growth pockets, knowing that mobile is a ways off. The recent $700 million ITA acquisition is a great case in point of how it is going to spread out some medium-sized to big-bets to see what sticks. That is, companies must find bigger and bigger chunks of revenue to maintain growth rates. This problem is documented well by innovation researchers Professor Clayton Christensen in The Innovators Solution, and Jim Collins in How the Mighty Fall.

–The company lacks a coherent strategy, especially in mobile. As Schmidt and other Google execs have stated, mobile is core to future growth. A number of people around the table that night had unique insight into Google’s mobile efforts. They argued that growing nascent mobile revenues will take significant time, especially since there aren’t many sizable acquisition targets available in mobile after Google’s purchase of AdMob. Instead, the recent purchase of ITA Software was an indicator of how the company might make some medium to big bets to see what sticks.

–It’s about people, people, people. Google’s engineering-dominated culture isn’t news to anyone. But As Peter Drucker opined in his landmark book Innovation and Entrepreneurship, “Successful innovators…look at figures, and they look at people.” The company has long recruited people who fit a very specific profile.

Product manager candidates, for example, are told they must have computer science degrees from top universities. But while Google’s core algorithm was a brilliant feat of engineering innovation, a growing chorus of voices question whether it can be sustained. That cookie-cutter approach to people misses important opportunities for diversity and creates glass ceilings for non-engineers, both of which stifle innovation. Cultural hubris, another pattern Jim Collins in particular raises, is of foremost concern. It is often said that at Google the engineers lead engineering, product, and even marketing decisions. But when the company has failed, such as with Google Wave or Google Radio, critics have questioned whether the company really understands people.

For these reasons and more, perhaps the question that “in the know” Silicon Valley observers are now increasingly asking is: Could Google be the next Microsoft? That is, much like Google revolutionized search, Microsoft was a pioneer with its market-dominating operating systems and Microsoft Office. But outside the Xbox, Microsoft has struggled severely to produce new innovations. Deeper cultural problems were hidden by amazing performance and success.

One thing is for certain: it’s a pivotal time in Google’s history. If the company does not put these types of issues on the table, the chorus of short sellers will increase. But with mountains of cash, access to great people and big problems, I see the moment as an opportunity. It’s a chance to reflect, ask some tough questions, openly discuss the challenges, and incorporate some fresh thinking and people, so that this great symbol of global innovation can evolve and grow.

What do you think—are you long or short? Is Google at risk of becoming the next Microsoft or on the verge of a creative explosion?

Chris Rock has become one of the most popular comedians in the world and while there is no doubt he’s got great talent – his brilliance also comes from his approach. So, for example, the acts he rolls out on HBO or global tour are actually the result of thousands of little bets – some of which worked, but many of which failed miserably, at least initially.

Consider his approach.

First, he picks small venues where he can do rapid, low-risk experiments with new material. In gearing up for his latest global tour, he made between 40 and 50 appearances at a small venue called the Stress Factory in New Brunswick, New Jersey, not far from where he lives. Rock says, “It’s like boxing training camp. I always pick a comedy club to work out in.”

In front of audiences of say 30 to 40 people, Rock will bring a yellow legal note pad with lots of ideas scribbled on it. In sets that run about 45 minutes, many of the jokes will fall flat, but according to according to fellow comedian Matt Ruby, “There were 5-10 lines during the night that were just ridiculously good. Like lightning bolts. My sense is that he starts with these bolts and then writes around them.”

But it’s all part of his approach. When the material falls flat, Rock will pause to say things like, “This needs to be fleshed out more if it’s gonna make it.”

Believe it or not, Amazon innovates much like Chris Rock. Led by founder and CEO Jeff Bezos, Amazon’s culture breathes experimentation, including to identify unique growth opportunities beyond the company’s core book business – such as Amazon Marketplace and Amazon Web Services.

It’s fascinating. Rock’s approach is both extremely creative and pragmatic simultaneously. He doesn’t over-analyze at first or put all of his hopes into one big idea. Rather, he quickly and inexpensively uses experiments to learn, gather insights, and identify opportunities then rapidly iterates, rigorously tests, and refines his ideas to create a flawless new show. Nothing happens by chance. He learns and pieces ideas together as he goes.

Chris Rock has become the king of comedy, but getting there doesn’t happen in a vacuum. His approach is genius.

Cross-posted on The Huffington Post

One thing consistently puzzles me: there’s a significant disconnect between policy makers and people who are working on actual problems in the grassroots. Teach for America founder and CEO Wendy Kopp shouldn’t need to hire lobbyists.

Wendy Kopp (source: Teach for America)

Consider this example: Gerald Chertavian, is the founder and CEO of Year Up. He is widely considered to be one of the most effective, strategic, and savvy social entrepreneurs in the country. Chertavian, a graduate of Bowdoin College and Harvard Business School, founded Year Up in 2000 (when we first met), after successfully building and selling a technology company. Ten years later Year Up, a one-year, job training program for urban young adults, is one of the fastest growing non-profits in the country, with an annual budget of $30 million, serving more than 1,200 students a year nationally.

Gerald Chertavian (source: Year Up)

His smarts and track record have drawn the attention from those who have a strong pulse on American culture, such as the New York Times’ David Brooks, who wrote about Chertavian in 2008. With his impressive talents and insights, you’d think that Chertavian would have the ear of federal lawmakers. After all, he has proven his ability to identify and solve social problems in the trenches (and, raise the money to do so). And, the federal government allocates millions of dollars toward similar government run programs each year.

But no. As Chertavian explained, Year Up has not been able to obtain a reliable, sustainable source of public funding; even when they agreed to take public funds only when they demonstrated results. Pay for performance in workforce development? This shouldn’t be a novel idea when we need to get 15 million American’s back to work. The reality is that the nation’s workforce development system is broken and needs to be redesigned from the ground up to focus upon outcomes and performance rather than inputs. Yet it was so difficult to get politicians to listen, Chertavian had to, in fact, hire lobbyists. And, it was (and has been) a constant uphill battle.

Chertavian’s experience is far from isolated. Teach for America (TFA), founded and led by the country’s best-known social entrepreneur Wendy Kopp, has recently been in the press around a similar challenge.

As the Wall Street Journal reported, Teach for America is now a $180 million organization. Last year, the WSJ reported, “Their 46,000 applicants included 12% of all Ivy League seniors, 7% of the graduating class of the University of Michigan at Ann Arbor, and 6% from U.C. Berkeley.” Kopp has grown TFA through private funding by roughly 30% a year for the past ten years.

Talk about evidence of effectiveness. These figures are astonishing, not to mention the fact that alums carry their TFA experience (working in the trenches) with them throughout their careers, for society’s benefit. TFA has become a formidable American institution. You’d think legislators would be chomping at the bit to support TFA. But, of course, the politics are more complicated.

Last year, Teach for America received $21 million in Federal funding and it’s seeking $50 million this year, including to keep up with demand for slots. Given that the Peace Corps receives $350 million in federal monies each year, Kopp says, “this seems like a no brainer… particularly given that TFA has proven results and is so heavily aligned with the federal agenda around education.”

I completely agree with Kopp’s assessment. If one of the best performing, most successful nonprofits the country – one that has proven, built, and funded its model from the ground up – cannot get a relatively small Federal allocation, it raises serious questions. Wendy Kopp and Gerald Chertavian should not have to hire a lobbying firm to get noticed or to be heard.

Behind the significant distrust of politicians and government (see the latest Pew poll if you need empirical evidence) is the very real sense that the policy-making world has become increasingly disconnected from the actual problems people face in their lives.

History teaches us that when governments lose moral authority to corrupt influences, demagogues can rise. By many indications, we’re on the precipice of one of those moments.

I don’t know anyone who would question that the Washington policy-making ethos must change. And, here’s one way how: listen to some of the country’s best and most proven social leaders whose organizations are fighting and scrapping in the grassroots every day. Wendy Kopp and Gerald Chertavian aren’t partisans. They’re problem solvers. Their agenda is to advance solutions to social problems that policy makers routinely screw up from the top down. Thankfully, NewProfit, led by Vanessa Kirsh, is working to address this confounding disconnect through an innovative initiative called America Forward.

Like Paul Volcker, Wendy Kopp and Gerald Chertavian are what I think of as America’s Trustees: people with the stature and experiences to stand above the partisan fray. We desperately need their creativity and leadership. Supporting Teach for America is a no brainer. It’s something small in the grand scheme of things that we can get right.

What can we take from this? Design has always been a part of Apple’s DNA and two key underlying principles from the world design thinking, which is being advanced in remarkable ways by my colleagues at the Stanford Institute of Design (the d.school), can be seen with the iPhone.

First, it’s critical to understand the underlying needs of your customers or partners, which can be very different than what they say they want. Not only is the phone enjoyable to use, the iPhone value chain (or value network) has incentives for its partners and monetization opportunities for Apple throughout. The prime example is the iPhone Application Store where outside software developers keep 70% of each sale for the products they develop, since Apple understands that outside software developers need the right incentives to work weekends and late nights. But, Steve Jobs seems more than happy to take 30%, especially as he predicts gross sales of iPhone applications will soon reach $1 billion.

When it comes to iPhone service and distribution, AT&T needs ARPUs and users, so Apple gives AT&T those in spades on an exclusive basis, and in exchange AT&T pays Apple an estimated $320-$420 for each new subscriber (according to Oppenheimer). Meantime, Best Buy needs to improve its brand and customer pull for mobile phone products and services. Adding iPhone sales to its stores will do just that, while Apple’s distribution reach will grow dramatically.

A second key design principle to highlight here is the use of rapid, low-cost prototypes to gather market insights in order to innovate and improve the offering. Each time a new application is launched, no one knows if it will become a big winner. Perhaps people will flock to games like “Texas hold ‘em”; or, maybe the entire financial community will rush to download the HP-12c calculator iPhone application. The original HP-12c does, after all, cost $80 compared to the $19.99 iPhone application. Apple cannot predict all of the needs it can serve with the iPhone and, as Chris Anderson brilliantly observed, there’s a Long Tail of needs. Through the iPhone Application Store, the market can surely align needs with solutions and Apple has designed its business model to facilitate the operation of that ecosystem, while taking nice profits along the way.

As more people and companies are incented to contribute to the iPhone ecosystem, the phone’s utility grows and the customer experience improves. That drives overall demand. All of this helps to explain why people are still willing to wait two hours in line to buy one or why one of the biggest challenges CIOs face these day is managing requests for iPhones (just ask any CIO).

Indeed, Apple is benefiting from the virtuous cycle of the iPhone ecosystem:

1) Design a product that people love to use;
2) Develop ways to fill the needs of partners who will then increase the value of the ecosystem;
3) Monetize each element of the value network; and,
4) Allow everyone in the ecosystem, most notably Apple, to reap the benefits of scale through increased revenues, profits, and defensibility of the model.

Case in point: Nokia recently announced plans to launch a phone with 300 songs pre-sold, but good luck competing against an iPhone ecosystem that becomes more valuable every day.

Let’s just hope Google’s Android platform doesn’t disrupt the iPhone phenomenon. It’s still too soon to tell.

Even still, we can all learn from Apple’s DNA - their innovation mindset - that by constantly observing and understanding the needs of those we are serving and challenging our assumptions against market desires through rapid, low-cost experiments, we can first create great value for our customers and partners, then capture and monetize that value throughout an ecosystem.

Essentially, Best Buy faces a massive challenge — how to accurately forecast its annual sales of over $40 billion, throughout over 1,000 stores worldwide, across thousands of SKUs, as well as sales online. This is retail, so customer demand is fickle and market insight is highly dispersed, and small percentage point differences between forecast and actual sales can have a big impact on the bottom line.

In 2004, Jeff Severts, then head of Best Buy’s advertizing division, found that eight merchant teams generated the consolidated forecast, i.e. those merchants who ordered the TVs, computers, video games, etc. As Severts told Gary Hamel, it was not uncommon for those forecasts to be off by 10% fewer than 30 days out. Serverts then heard James Surowiecki speak about his book The Wisdom of the Crowds, and wondered if employees from throughout Best Buy could collectively provide the market insight and information to more accurately predict sales than the merchant teams.

Severts was allowed to start with a low-risk, focused experiment. For a $50 prize, he challenged employees throughout Best Buy’s $1 billion gift card division to estimate monthly gift card sales. He received 192 estimates that, when aggregated, was off actual sales by less than one-half of one percent, compared a 5% miss for the gift-card forecasting team. That successful outcome led to a much larger experiment: estimating Best Buy’s 2005 holiday sales. The results spoke for themselves — the crowd’s estimate was 99.9% accurate four months out, compared to 93% for the merchants.

As yesterday’s WSJ article describes, Best Buy continues to test and refine its prediction systems, but the lessons are simple: leaders that give employees permission run low-risk experiments are much more likely to innovate their products, services, processes, and even their company culture than those who believe that insights come only from small, select groups of people.

Great innovative leaders, such as Proctor & Gamble CEO A.G. Lafley, Brad Anderson, CEO at Best Buy, or the folks at Google surround themselves with diverse points of view and constantly use focused experiments to test new ideas. If you think you have the best insight about a complex problem, you probably don’t, but worse, you’re probably not a good leader.