Start-Up Nation - The Story of Israel's Economic Miracle Part 3

In fact, according to the Organisation for Economic Co-operation and Development (OECD), 45 percent of Israelis are university-educated, which is among the highest percentages in the world. And according to a recent IMD World Compet.i.tiveness Yearbook IMD World Compet.i.tiveness Yearbook, Israel was ranked second among sixty developed nations on the criterion of whether "university education meets the needs of a compet.i.tive economy."4 By the time students finish college, they're in their mid-twenties; some already have graduate degrees, and a large number are married. "All this changes the mental ability of the individual," Shainberg reasoned. "They're much more mature; they've got more life experience. Innovation is all about finding ideas."

Innovation often depends on having a different perspective. Perspective comes from experience. Real experience also typically comes with age or maturity. But in Israel, you get experience, perspective, and maturity at a younger age, because the society jams so many transformative experiences into Israelis when they're barely out of high school. By the time they get to college, their heads are in a different place than those of their American counterparts.

"You've got a whole different perspective on life. I think it's that later education, the younger marriage, the military experience-and I spent eighteen years in the [British] navy, so I can sort of empathize with that sort of thing," Shainberg went on. "In the military, you're in an environment where you have to think on your feet. You have to make life-and-death decisions. You learn about discipline. You learn about training your mind to do things, especially if you're frontline or you're doing something operational. And that can only be good and useful in the business world."

This maturity is especially powerful when mixed with an almost childish impatience.

Since their country's founding, Israelis have been keenly aware that the future-both near and distant-is always in question. Every moment has strategic importance. As Mark Gerson, an American entrepreneur who has invested in several Israeli start-ups, described it, "When an Israeli man wants to date a woman, he asks her out that night. When an Israeli entrepreneur has a business idea, he will start it that week. The notion that one should acc.u.mulate credentials before launching a venture simply does not exist. This is actually good in business. Too much time can only teach you what can go wrong, not what could be transformative."5 For Amir, as for many other conscripts, the IDF provided him with an exciting opportunity to test and prove himself. But the IDF offers recruits another valuable experience: a unique s.p.a.ce within Israeli society where young men and women work closely and intensely with peers from different cultural, socioeconomic, and religious backgrounds. A young Jew from Russia, another from Ethiopia, a secular sabra (native-born Israeli) from a sw.a.n.ky Tel Aviv suburb, a yeshiva student from Jerusalem, and a kibbutznik from a farming family might all meet in the same unit. They'll spend two to three years serving together full-time, and then spend another twenty-plus years of annual service in the reserves.

As we've seen, the IDF was structured to rely heavily on reserve forces, since there is no way for such a small country to maintain a sufficiently large standing army. So for combat soldiers, connections made in the army are constantly renewed through decades of reserve duty. For a few weeks a year, or sometimes just a week at a time, Israelis depart from their professional and personal lives to train with their military unit. Not surprisingly, many business connections are made during the long hours of operations, guard duty, and training.

"Every five years Harvard Business School hosts a cla.s.s reunion," says Tal Keinan, an Israeli HBS grad. "It's fun. It helps keep your network intact. We spend two days visiting with cla.s.smates, sitting in lectures. But imagine a reunion every year, and that it lasts for two to four weeks. And it's with the unit you had spent three years with in the army. And instead of sitting in lectures, you're doing security patrols along the border. It nourishes an entirely different kind of lifelong bond."6 Indeed, relationships developed during military service form another network in what is already a very small and interconnected country. "The whole country is one degree of separation," says Yossi Vardi, the G.o.dfather of dozens of Internet start-ups and one of the champion networkers in the wired world. Like Jon Medved, Vardi is one of Israel's legendary business amba.s.sadors.

Vardi says he knows of Israeli companies that have stopped using help-wanted ads: "It's now all word of mouth. . . . The social graph is very simple here. Everybody knows everybody; everybody was serving in the army with the brother of everybody; the mother of everybody was the teacher in their school; the uncle was the commander of somebody else's unit. n.o.body can hide. If you don't behave, you cannot disappear to Wyoming or California. There is a very high degree of transparency."7 The benefits of this kind of interconnectedness are not limited to Israel, although in Israel they are unusually intense and widespread. The benefits of this kind of interconnectedness are not limited to Israel, although in Israel they are unusually intense and widespread.

Unsurprisingly, the IDF has many things in common with other militaries around the world, including equally grueling tryouts for their elite units. However, most of the other militaries' selection processes differ in that they must choose from among volunteer recruits. They are not able to scour the records of every high school student and invite the highest achievers to compete against their most talented peers for a few coveted spots.

In the United States, for example, the military is limited to choosing only from among those potential recruits who express interest. Or as one U.S. recruiter put it, "In Israel, the military gets to select the best. In the U.S., it's the other way around. We can only hope that the best choose us."8 The American military goes to great lengths to seek out the best and hope that they may be interested in serving in the U.S. military. Take the United States Military Academy at West Point's freshman cla.s.s each year. The median grade point average hovers around 3.5, and the admissions department can rattle off all sorts of statistics to quantify the leadership apt.i.tude of its student cadets, including the number who were varsity team captains in high school (60 percent), who were high school cla.s.s presidents (14 percent), and so on. And the admissions department keeps an extremely comprehensive database of all inquiring prospective applicants, often going back to elementary school. As author David Lipsky writes in his book about West Point, Absolutely American Absolutely American, "Drop a line to West Point in the sixth grade and you'll receive correspondence from admissions every six months until you hit high school, when the rate doubles." Approximately fifty thousand high school juniors open West Point prospective files each year, which culminates in a freshman cla.s.s of twelve hundred cadets. At the end of the five-year program, each graduate has received an education valued at a quarter of a million dollars.9 But even with extraordinary outreach efforts, like West Point admissions, a number of the senior leaders of the U.S. armed forces are frustrated that they cannot gain access to the academic records of a broad cross section of Americans. And without that access, they cannot target a tailored recruitment pitch.

A conversation with an American military man underscores the economic value of the Israeli system. Colonel John Lowry, a marine infantry officer, joined the Marine Corps after high school and has been in active duty or reserves for the past twenty-five years. He earned an MBA from Harvard Business School and went on to climb the corporate ranks at Harley-Davidson, the multibillion-dollar premium motorcycle manufacturer. He did so while fulfilling his commitment to the reserves, serving stints in the Horn of Africa, the Persian Gulf, and, prior to his business career, Operation Desert Storm. Lowry commands one thousand marines and travels to various reserve bases across the country for two weekends each month, in addition to annual month-long call-ups. Lowry also helps oversee a number of Harley factory plants and manages about one thousand employees.10 By day he is a senior business executive, but by night he trains marines preparing for tours in Iraq. He transitions seamlessly between these two worlds. He only wishes that the kind of military experience he had was as common in the American business world as it is among Israeli entrepreneurs.

"The military gets you at a young age and teaches you that when you are in charge of something, you are responsible for everything that happens . . . and everything that does not happen," Lowry told us. "The phrase 'It was not my fault' does not exist in the military culture." This comment sounds a lot like Farhi's point from chapter 2 about company commanders taking ownership of whatever happens in their territory. "No college experience disciplines you to think like that . . . with high stakes and intense pressure," says Lowry, a graduate of Princeton. "When you are under that kind of pressure, at that age, it forces you to think three or four chess moves ahead . . . with everything you do . . . on the battlefield . . . and in business."

The Marine Corps network is important to Lowry. His military peers are a built-in board of advisers for him. "It's another world of friendships, outside of work, but many of them are connected to my line of work," he notes. "Just the other day I spoke with one fellow officer who is in management at Raytheon, based in Abu Dhabi. Many of these guys I've known anywhere from five years to twenty-five years."

The military is also much better than college for inculcating young leaders with a sense of what he calls social range: "The people you are serving with come from all walks of life; the military is this great purely merit-based inst.i.tution in our society. Learning how to deal with anybody-wherever they come from-is something that I leverage today in business when dealing with my suppliers and customers."

If all this sounds similar to our description of the IDF's role in fostering Israel's entrepreneurial culture, it should. While a majority of Israeli entrepreneurs were profoundly influenced by their stint in the IDF, a military background is hardly common in Silicon Valley or widespread in the senior echelons of corporate America.

As Israeli entrepreneur Jon Medved-who has sold several start-ups to large American companies-told us, "When it comes to U.S. military resumes, Silicon Valley is illiterate. It's a shame. What a waste of the kick-a.s.s leadership talent coming out of Iraq and Afghanistan. The American business world doesn't quite know what to do with them."11 This gulf between business and the military is symptomatic of a wider divide between America's military and civilian communities, which was identified by the leadership of West Point over a decade ago. In the summer of 1998, Lieutenant General Daniel Christman, the superintendent of West Point, and General John Abizaid, commandant at West Point, were driving on the New Jersey turnpike and pulled off at a roadside food and gas station mall for a quick meal at Denny's. Despite the clearly visible stars on their Cla.s.s B green army uniforms, the hostess smiled and enthusiastically expressed her grat.i.tude to Generals Christman and Abizaid for the cleanliness of the public parks. She thought they were staff of the parks department.12 Despite the military leadership's outreach, too few young Americans today feel any connection to their contemporaries in the military, let alone have actually ever known one who has served. Even after two new war fronts, today only 1 in 221 Americans are in active-duty service. Compare that to the end of the Second World War, when 1 in 10 Americans were serving. Tom Brokaw, author of The Greatest Generation The Greatest Generation, told us that after World War II a young man who had not served would have a hard time getting a good job in business. "There must be something wrong with him" was how Brokaw characterized a typical reaction of employers back then to nonvets looking for private-sector jobs.13 But the way David Lipsky describes it, when the draft ended in 1975, after the Vietnam War, an opposite climate began to settle in: "Civilian culture and military culture shook hands, exchanged phone numbers, and started to lose track of each other."

The economic implications of this drift were driven home to us by Al Chase, who runs an executive recruitment firm focused on the placement of U.S. military officers in private enterprises ranging from small start-ups to large Fortune 100 companies such as PepsiCo and GE. Having placed hundreds of vets, he knows what kind of entrepreneurial ac.u.men is formed by battlefield experience. According to Chase, the Cold War military was different. Young officers could go an entire career without acquiring real battlefield experience. But the Iraq and Afghanistan wars have changed that. Almost every young officer has served multiple tours.14 As we've seen firsthand in Iraq, the post-9/11 wars have largely been counterinsurgencies, where critical decisions have been made by junior commanders. General David Petraeus's counterinsurgency strategy in Iraq, for example, was predicated on U.S. troops' not just being present and patrolling local Iraqi residential neighborhoods in order to provide security for Iraqi civilians but actually living in the neighborhoods. This is different from the way most U.S. military troops have fought in earlier wars, including in the early years of the Iraq war. Back then, U.S. soldiers and marines lived in forward operating bases (FOBs), enormous self-contained complexes that roughly replicate bases back in the States. A typical FOB could house tens of thousands of troops-if not more. But the soldiers and marines in neighborhood bases in Iraq since 2007 have numbered in only the tens or low hundreds. This alone gives smaller units much more independence from the division in their daily operations, and the junior commander is given more authority to make decisions and improvise.

Nathaniel Fick was a marine captain who fought in the Afghanistan and Iraq wars, before pursuing a dual-degree program at Harvard Business School and the Kennedy School of Government and penning a book about his experiences called One Bullet Away One Bullet Away. He told us that he was trained to think about fighting the "three-block war." In Iraq and Afghanistan, he said, "Marines could be pa.s.sing out rice on one city block, doing patrols to keep the peace on another block, and engaged in a full-on firefight on the third block. All in the same neighborhood."15 Junior commanders in America's new wars find themselves playing the role of small-town mayor, economic-reconstruction czar, diplomat, tribal negotiator, manager of millions of dollars' worth of a.s.sets, and security chief, depending on the day.

And, as in the IDF, today's junior commanders are also more inclined to challenge senior officers in ways they typically would not have in the past. This is partly from serving multiple tours and having watched their peers get killed as a result of what junior officers often believe are bad decisions, lack of strategy, or lackl.u.s.ter resources provided by higher-ups. As American military a.n.a.lyst Fred Kagan explained it, U.S. soldiers and marines "have caught up with the Israelis in the sense that a junior guy who has been deployed multiple times will dispense with the niceties towards superiors." There is a correlation between battlefield experience and the proclivity of subordinates to challenge their commanders.

Given all this battlefield entrepreneurial experience, the vets coming out of the Iraq and Afghanistan wars are better prepared than ever for the business world, whether building start-ups or helping lead larger companies through the current turbulent period.

Al Chase advises vets not to be intimidated by others in the job market who have already been in the business world and know the "nomenclature." Vets, he said, bring things to the table that their business peers could only dream about, including a sense of proportionality-what is truly a life-or-death situation and what is something less than that; what it takes to motivate a workforce; how to achieve consensus under duress; and a solid ethical base that has been tested in the crucible of combat.

Brian Tice, an infantry officer, was a captain in the U.S. Marine Corps when he decided that he wanted to make the transition to business. By that time he was thirty years old and had completed five deployments-including a.s.signments in Haiti and Afghanistan-and was in the middle of his sixth, in Iraq. He wrote his essays for his applications to Stanford's MBA program on a laptop in a burnt-out Iraqi building near the Al Asad Air Base, in the violent Al Anbar Province of western Iraq. He had to complete his application at odd hours because his missions always took place in the middle of the night. As an operations officer for a unit of 120 marines, Tice had to build the "package" for each operation against insurgents and al Qaeda-determine how much force, how many marines, and how much air support were needed. So the only time he could rest and plan future operations was during the day.16 Based over eight thousand miles from Stanford's campus, he couldn't meet the school's requirement for an in-person interview. So the admissions department scheduled one over the phone, which he did between sniper operations and raids, while standing in an open expanse of desert. Tice asked the admissions officer to excuse the blaring noise of helicopters flying overhead, and had to cut the interview short when mortars landed nearby.

More and more American military officers are applying for MBA programs and, like Captain Tice, are going to extraordinary lengths to do so. In 2008, of aspiring MBA applicants that took the Graduate Management Admission Test (GMAT), 15,259, or 6 percent, had military experience. At the University of Virginia's Darden School of Business, the number of military applicants rose 62 percent from 2007 to 2008. The first-year cla.s.s in 2008 had 333 students, 40 of whom were from the military, including 38 who had served in Afghanistan or Iraq.

The Graduate Management Admission Council, which administers the GMAT, has made it a priority to better organize the path from war front to business school. It has launched its Operation MBA program, which helps members of the armed forces find B-schools that waive application fees or offer generous financial aid packages and even tuition deferrals for cash-strapped vets. And the council is even setting up GMAT test centers on military bases, one of which was opened in 2008 at Fort Hood in Texas; another is planned to open at Yokota Air Base in j.a.pan.

Yet the capacity of U.S. corporate recruiters and executives to make sense of combat experience and its value in the business world is limited. As Jon Medved explained, most American business-people simply do not know how to read a military resume. Al Chase told us that a number of the vets he's worked with have walked a business interviewer through all their leadership experiences from the battlefield, including case studies in high-stakes decision making and management of large numbers of people and equipment in a war zone, and at the end of it the interviewer has said something along the lines of "That's very interesting, but have you ever had a real job?"

In Israel it is the opposite. While Israeli businesses still look for private-sector experience, military service provides the critical standardized metric for employers-all of whom know what it means to be an officer or to have served in an elite unit.

CHAPTER 5.

Where Order Meets Chaos

Doubt and argument-this is a syndrome of the Jewish civilization and this is a syndrome of today's Israel.

-AMOS O OZ ABOUT THIRTY NATIONS have compulsory military service that lasts longer than eighteen months. Most of these countries are developing or nondemocratic or both. But among first-world countries, only three require such a lengthy period of military service: Israel, South Korea, and Singapore. Not surprisingly, all three face long-standing existential threats or have fought wars for survival in recent memory. have compulsory military service that lasts longer than eighteen months. Most of these countries are developing or nondemocratic or both. But among first-world countries, only three require such a lengthy period of military service: Israel, South Korea, and Singapore. Not surprisingly, all three face long-standing existential threats or have fought wars for survival in recent memory.1 For Israel, the threat to its existence began before it had become a sovereign nation. Beginning in the 1920s, the Arab world resisted the establishment of a national Jewish state in Palestine, then sought to defeat or weaken Israel in numerous wars. South Korea has lived under a constant threat from North Korea, which has a large standing army poised just a few miles from Seoul, South Korea's capital. And Singapore lives with memories of the occupation by j.a.pan during World War II, its recent struggle for independence, which culminated in 1965, and the volatile period that followed.

Singaporean National Service was introduced in 1967. "We had to defend ourselves. It was a matter of survival. As a small country with a small population, the only way we could build a force of sufficient size . . . was through conscription," explained Defense Minister Teo Chee Hean. "It was a decision not taken lightly given the significant impact that conscription would have on every Singaporean. But there was no alternative."2 At independence, Singapore had only two infantry regiments, and they had been created and were commanded by the British. Two-thirds of the soldiers were not even residents of Singapore. Looking for ideas, the city-state's first defense minister, Goh Keng Swee, called Mordechai Kidron, the former Israeli amba.s.sador to Thailand, whom he had gotten to know while the two men were working in Asia. "Goh told us that they thought that only Israel, a small country surrounded by Muslim countries, . . . could help them build a small, dynamic army," Kidron has said.3 Singapore gained independence twice over the course of just two years. The first was independence from the British in 1963, as part of Malaysia. The second was independence from Malaysia, in 1965, to stave off civil war. Singapore's current prime minister, Goh Chok Tong, described his country's relations with Malaysia as having remained tense after an "unhappy marriage and acrimonious divorce." Singaporeans also feared threats from Indonesia, all while an armed Communist insurgency was looming just to Singapore's north, in Indochina.

In response to Goh's pleas for help, the IDF tasked Lieutenant Colonel Yehuda Golan with writing two manuals for the nascent Singaporean army: one on combat doctrine and the structure of a defense ministry and another on intelligence inst.i.tutions. Later, six IDF officers and their families moved to Singapore to train soldiers and create a conscription-based army.

Along with compulsory service and a career army, Singapore also adopted elements of the IDF's model of reserve service. Every soldier who completes his regular service is obligated to serve for short stints every year, until the age of thirty-three.

For Singapore's founding generation, national service was about more than just defense. "Singaporeans of all strata of society would train shoulder to shoulder in the rain and hot sun, run up hills together, and learn to fight as a team in jungles and built-up areas. Their common experience in National Service would bond them, and shape the Singapore ident.i.ty and character," Prime Minister Goh said on the Singaporean military's thirty-fifth anniversary.

"We are still evolving as a nation," Goh continued. "Our forefathers were immigrants. . . . They say that in National Service, everyone-whether Chinese, Malay, Indian, or Eurasian-is of the same color: a deep, sunburnt brown! When they learn to fight as one unit, they begin to trust, respect, and believe in one another. Should we ever have to go to war to defend Singapore, they will fight for their buddies in their platoon as much as for the country."4 Subst.i.tute "Israel" for "Singapore," and this speech could have been delivered by David Ben-Gurion.

Although Singapore's military is modeled after the IDF-the testing ground for many of Israel's entrepreneurs-the "Asian Tiger" has failed to incubate start-ups. Why?

It's not that Singapore's growth hasn't been impressive. Real per capita GDP, at over U.S. $35,000, is one of the highest in the world, and real GDP growth has averaged 8 percent annually since the nation's founding. But its growth story notwithstanding, Singapore's leaders have failed to keep up in a world that puts a high premium on a trio of attributes historically alien to Singapore's culture: initiative, risk-taking, and agility.

A growing awareness of the risk-taking gap prompted Singapore's finance minister, Tharman Shanmugaratnam, to drop in on Nava Swersky Sofer, an Israeli venture capitalist who went on to run Hebrew University's technology transfer company. The university company, called Yissum, is among the top ten academic programs in the world, measured by the commercialization of academic research. Shanmugaratnam had one question for her: "How does Israel do it?" He was nearby for a G-20 meeting, but he skipped the last day of the summit to come to Israel.

Today the alarm bells are being sounded even by Singapore's founding father, Lee Kuan Yew, who served as prime minister for three decades. "It's time for a new burst of creativity in business," he says. "We need many new tries, many start-ups."5 There is a similar feeling in Korea, another country that has a military draft and a sense of external threat, and yet, as in Singapore and not as in Israel, these attributes have not produced a start-up culture. Korea, clearly, has no shortage of large technology companies. Erel Margalit, an Israeli entrepreneur with a stable of media start-ups, actually sees Korea as fertile ground for his cutting-edge companies. "America is the queen of content," Margalit said, "but it is still in the broadcast era, while China and Korea are in the interactive age."6 So why doesn't Korea produce nearly as many start-ups per capita as Israel? We turned to Laurent Haug for insight. Haug is the creator and force behind the Lift conferences, which focus on the nexus between technology and culture. Since 2006, his gatherings have alternated between Geneva, Switzerland, and Jeju, Korea. We asked Haug why there were not more start-ups in Korea, despite the great affinity Koreans have for technology.

"The fear of losing face, and the bursting of the Internet bubble in 2000," he told us. "In Korea, one should not be exposed while failing. Yet in early 2000, many entrepreneurs jumped on the bandwagon of the new economy. When the bubble burst, their public failure left a scar on entrepreneurship." Haug was surprised to hear from the director of a technology incubator in Korea that a call for projects received only fifty submissions, "a low figure when you know how innovative and forward-thinking Korea really is." To Haug, who has also explored the Israeli tech scene, "Israelis seem to be on the other side of the spectrum. They don't care about the social price of failure and they develop their projects regardless of the economic or political situation."7 So when Swersky Sofer hosts visitors from Singapore, Korea, and many other countries, the challenge is how to convey the cultural aspects that make Israel's start-up scene tick. Conscription, serving in the reserves, living under threat, and even being technologically savvy are not enough. What, then, are the other ingredients?

"I'll give you an a.n.a.logy from an entirely different perspective," Tal Riesenfeld told us matter-of-factly. "If you want to know how we teach improvisation, just look at Apollo. What Gene Kranz did at NASA-which American historians hold up as model leadership-is an example of what's expected from many Israeli commanders in the battlefield." His response to our question about Israeli innovation seemed completely out of context, but he was speaking from experience. During his second year at Harvard Business School, Riesenfeld launched a start-up with one of his fellow Israeli commandos. They presented their proposal at the Harvard business plan compet.i.tion and beat out the seventy other teams for first place.8 After graduating from HBS at the top of his cla.s.s, Riesenfeld turned down an attractive offer from Google in order to start Tel Avivbased Eyeview. Earlier, Riesenfeld had made it through one of the most selective recruitment and training programs in the Israeli army.

While he was at HBS, Riesenfeld studied a case that compared the lessons of the Apollo 13 Apollo 13 and and Columbia Columbia s.p.a.ce shuttle crises. s.p.a.ce shuttle crises.9 The 2003 The 2003 Columbia Columbia mission has a special resonance for Israelis. One of its crew members-air force colonel Ilan Ramon, the first Israeli astronaut-was killed when mission has a special resonance for Israelis. One of its crew members-air force colonel Ilan Ramon, the first Israeli astronaut-was killed when Columbia Columbia disintegrated. But Ramon had been an Israeli hero long before. He was a pilot in the daring 1981 air force mission that destroyed Iraq's nuclear facility, Osirak. disintegrated. But Ramon had been an Israeli hero long before. He was a pilot in the daring 1981 air force mission that destroyed Iraq's nuclear facility, Osirak.

HBS professors Amy Edmondson, Michael Roberto, and Richard Bohmer spent two years researching and comparing the Apollo Apollo and and Columbia Columbia crises. They produced a study that became the basis for one of Riesenfeld's cla.s.ses, a.n.a.lyzing the lessons learned from a business-management perspective. When Riesenfeld first read the HBS case, in 2008, the issues it presented were immediately familiar to the ex-commando. But why had Riesenfeld mentioned the case to us? What was the connection to Israel, or to its innovation economy? crises. They produced a study that became the basis for one of Riesenfeld's cla.s.ses, a.n.a.lyzing the lessons learned from a business-management perspective. When Riesenfeld first read the HBS case, in 2008, the issues it presented were immediately familiar to the ex-commando. But why had Riesenfeld mentioned the case to us? What was the connection to Israel, or to its innovation economy?

The Apollo 13 Apollo 13 crisis occurred on April 15, 1970, when the s.p.a.ceship had traveled three-fourths of the way to the moon. It was less than a year after Neil Armstrong and Buzz Aldrin had stepped off crisis occurred on April 15, 1970, when the s.p.a.ceship had traveled three-fourths of the way to the moon. It was less than a year after Neil Armstrong and Buzz Aldrin had stepped off Apollo 11 Apollo 11. NASA was riding high. But when Apollo 13 Apollo 13 was two days into its mission, traveling two thousand miles per hour, one of its primary oxygen tanks exploded. This led astronaut John Swigert to utter what has by now become a famous line: "Houston, we've had a problem." was two days into its mission, traveling two thousand miles per hour, one of its primary oxygen tanks exploded. This led astronaut John Swigert to utter what has by now become a famous line: "Houston, we've had a problem."

The flight director, Gene Kranz, was in charge of managing the mission-and the crisis-from the Johnson s.p.a.ce Center in Houston. He was immediately presented with rapidly worsening readouts. First he was informed that the crew had enough oxygen for eighteen minutes; a moment later that was revised to seven minutes; then it became four minutes. Things were spiraling out of control.

After consulting several NASA teams, Kranz told the astronauts to move into the smaller lunar extension module, which was designed to detach from Apollo Apollo for short subtrips in s.p.a.ce. The extension module had its own small supply of oxygen and electricity. Kranz later recalled that he had to figure out a way to "stretch previous resources, barely enough for two men for two days, to support three men for four days." for short subtrips in s.p.a.ce. The extension module had its own small supply of oxygen and electricity. Kranz later recalled that he had to figure out a way to "stretch previous resources, barely enough for two men for two days, to support three men for four days."

Kranz then directed a group of teams in Houston to lock themselves in a room until they could diagnose the oxygen problem and come up with ways to get the astronauts back into Apollo Apollo and then home. This was not the first time these teams had met. Kranz had a.s.sembled them months in advance, in myriad configurations, and practice drills each day had gotten them used to responding to random emergencies of all shapes and sizes. He was obsessed with maximizing interaction not only within teams but between teams and NASA's outside contractors. He made sure that they were all in proximity during training, even if it meant circ.u.mventing civil service rules barring contractors from working full-time on the NASA premises. Kranz did not want there to be any lack of familiarity between team members who one day might have to deal with a crisis together. and then home. This was not the first time these teams had met. Kranz had a.s.sembled them months in advance, in myriad configurations, and practice drills each day had gotten them used to responding to random emergencies of all shapes and sizes. He was obsessed with maximizing interaction not only within teams but between teams and NASA's outside contractors. He made sure that they were all in proximity during training, even if it meant circ.u.mventing civil service rules barring contractors from working full-time on the NASA premises. Kranz did not want there to be any lack of familiarity between team members who one day might have to deal with a crisis together.

Three days into the crisis, Kranz and his teams had managed to figure out creative ways to get Apollo Apollo back to earth while consuming a fraction of the power that would typically be needed. As the back to earth while consuming a fraction of the power that would typically be needed. As the New York Times New York Times editorialized, the crisis would have been fatal had it not been for the "NASA network whose teams of experts performed miracles of emergency improvisation." editorialized, the crisis would have been fatal had it not been for the "NASA network whose teams of experts performed miracles of emergency improvisation."10 It was an incredible feat and a riveting story. But But, we asked Riesenfeld, what's the connection to Israel? what's the connection to Israel? Fast-forward to February 1, 2003, he told us, sixteen days into the Fast-forward to February 1, 2003, he told us, sixteen days into the Columbia Columbia mission, when the s.p.a.ce shuttle exploded into pieces as it reentered the earth's atmosphere. We now know that a piece of insulating foam-weighing 1.67 pounds-had broken off the external fuel tank during takeoff. The foam struck the leading edge of the shuttle's left wing, making a hole that would later allow superheated gases to rip through the wing's interior. mission, when the s.p.a.ce shuttle exploded into pieces as it reentered the earth's atmosphere. We now know that a piece of insulating foam-weighing 1.67 pounds-had broken off the external fuel tank during takeoff. The foam struck the leading edge of the shuttle's left wing, making a hole that would later allow superheated gases to rip through the wing's interior.

There were over two weeks of flight time between takeoff-when the foam had first struck the wing-and the explosion. Could something have been done during this window to repair Columbia Columbia?

After reading the HBS study, Riesenfeld certainly thought so. He pointed to the handful of midlevel NASA engineers whose voices had gone unheard. As they watched on video monitors during a postlaunch review session, these engineers saw the foam dislodge. They immediately notified NASA's managers. But they were told that the foam "issue" was nothing new-foam dislodgments had damaged shuttles in previous launches and there had never been an accident. It was just a maintenance problem. Onward Onward.

The engineers tried to push back. This broken piece of foam was "the largest ever," they said. They requested that U.S. satellites-already in orbit-be dispatched to take additional photos of the punctured wing. Unfortunately, the engineers were overruled again. Management would not even acquiesce to their secondary request to have the astronauts conduct a s.p.a.cewalk to a.s.sess the damage and try to repair it in advance of their return to earth.

NASA had seen foam dislodgments before; since they hadn't caused problems in the past, they should be treated as routine, management ruled; no further discussion was necessary. The engineers were all but told to go away.

This was the part of the HBS study that Riesenfeld focused on. The study's authors explained that organizations were structured under one of two models: a standardized model, where routine and systems govern everything, including strict compliance with timelines and budgets, or an experimental model, where every day, every exercise, and every piece of new information is evaluated and debated in a culture that resembles an R&D laboratory.

During the Columbia Columbia era, NASA's culture was one of adherence to routines and standards. Management tried to shoehorn every new piece of data into an inflexible system-what Roberta Wohlstetter, a military intelligence a.n.a.lyst, describes as our "stubborn attachment to existing beliefs." era, NASA's culture was one of adherence to routines and standards. Management tried to shoehorn every new piece of data into an inflexible system-what Roberta Wohlstetter, a military intelligence a.n.a.lyst, describes as our "stubborn attachment to existing beliefs."11 It's a problem she has encountered in the world of intelligence a.n.a.lysis, too, where there is often a failure of imagination when a.s.sessing the behavior of enemies. It's a problem she has encountered in the world of intelligence a.n.a.lysis, too, where there is often a failure of imagination when a.s.sessing the behavior of enemies.

NASA's transformation from the Apollo Apollo culture of exploration to the culture of exploration to the Columbia Columbia culture of rigid standardization began in the 1970s, when the s.p.a.ce agency requested congressional funding for the new shuttle program. The shuttle had been promoted as a reusable s.p.a.cecraft that would dramatically reduce the cost of s.p.a.ce travel. President Nixon said at the time that the program would "revolutionize transportation into near s.p.a.ce, by routinizing it." It was projected that the shuttle would conduct an unprecedented fifty missions each year. Former air force secretary Sheila Widnall, who was a member of the Columbia Accident Investigation Board, later said that NASA pitched culture of rigid standardization began in the 1970s, when the s.p.a.ce agency requested congressional funding for the new shuttle program. The shuttle had been promoted as a reusable s.p.a.cecraft that would dramatically reduce the cost of s.p.a.ce travel. President Nixon said at the time that the program would "revolutionize transportation into near s.p.a.ce, by routinizing it." It was projected that the shuttle would conduct an unprecedented fifty missions each year. Former air force secretary Sheila Widnall, who was a member of the Columbia Accident Investigation Board, later said that NASA pitched Columbia Columbia as "a 747 that you could simply land and turn around and operate again." as "a 747 that you could simply land and turn around and operate again."

But as the HBS professors point out, "s.p.a.ce travel, much like technological innovation, is a fundamentally experimental endeavor and should be managed that way. Each new flight should be an important test and source of data, rather than a routine application of past practices." Which is why Riesenfeld directed us to the study. Israeli war-fighting is also an "experimental endeavor," as we saw in the story of Israel's handling of the Saggers in 1973. The Israeli military and Israeli start-ups in many ways live by the Apollo Apollo culture, he told us. culture, he told us.

Connected to this Apollo Apollo culture, certainly in Nava Swersky Sofer's estimation, is a can-do, responsible att.i.tude that Israelis refer to as culture, certainly in Nava Swersky Sofer's estimation, is a can-do, responsible att.i.tude that Israelis refer to as rosh gadol rosh gadol. In the Israeli army, soldiers are divided into those who think with a rosh gadol rosh gadol-literally, a "big head"-and those who operate with a rosh katan rosh katan, or "little head." Rosh katan Rosh katan behavior, which is shunned, means interpreting orders as narrowly as possible to avoid taking on responsibility or extra work. behavior, which is shunned, means interpreting orders as narrowly as possible to avoid taking on responsibility or extra work. Rosh gadol Rosh gadol thinking means following orders but doing so in the best possible way, using judgment, and investing whatever effort is necessary. It emphasizes improvisation over discipline, and thinking means following orders but doing so in the best possible way, using judgment, and investing whatever effort is necessary. It emphasizes improvisation over discipline, and challenging the chief challenging the chief over respect for hierarchy. Indeed, "challenge the chief" is an injunction issued to junior Israeli soldiers, one that comes directly from a postwar military commission that we'll look at later. But everything about Singapore runs counter to a over respect for hierarchy. Indeed, "challenge the chief" is an injunction issued to junior Israeli soldiers, one that comes directly from a postwar military commission that we'll look at later. But everything about Singapore runs counter to a rosh gadol rosh gadol mentality. mentality.

Spend time in Singapore and it's immediately obvious that it is tidy. Extremely tidy. Perfectly manicured green lawns and lush trees are framed by a skyline of majestic new skysc.r.a.pers. Global financial inst.i.tutions' outposts can be found on nearly every corner. The streets are free of trash; even innocuous litter is hard to spot. Singaporeans are specifically instructed on how to be polite, how to be less contentious and noisy, and not to chew gum in public.

Tidiness extends to the government, too. Lee Kuan Yew's People's Action Party has basically been in uninterrupted power since Singaporean independence. This is just the way Lee wants it. He has always believed that a vibrant political opposition would undermine his vision for an orderly and efficient Singapore. Public dissent has been discouraged, if not suppressed outright. This att.i.tude is taken for granted in Singapore, but in Israel it's foreign.

Israeli air force pilot Yuval Dotan is also a graduate of Harvard Business School. When it comes to "Apollo vs. vs. Columbia Columbia," he believes that had NASA stuck to its exploratory roots, foam strikes would have been identified and seriously debated at the daily "debrief." In Israel's elite military units, each day is an experiment. And each day ends with a grueling session whereby everyone in the unit-of all ranks-sits down to deconstruct the day, no matter what else is happening on the battlefield or around the world. "The debrief is as important as the drill or live battle," he told us. Each flight exercise, simulation, and real operation is treated like laboratory work "to be examined and reexamined, and reexamined again, open to new information, and subjected to rich-and heated-debate. That's how we are trained."12 In these group debriefs, emphasis is put not only on unrestrained candor but on self-criticism as a means of having everyone-peers, subordinates, and superiors-learn from every mistake. "It's usually ninety minutes. It's with everybody. It's very personal. It's a very tough experience," Dotan said, recalling the most sweat-inducing debriefings of his military career. "The guys that got 'killed' [in the simulations], for them it's very tough. But for those who survive a battle-even a daily training exercise-the next-toughest part is the debriefing."

Dotan was an IAF formation commander flying F-16 fighter jets. "The way you communicate and deconstruct a disagreement between differing perspectives on an event or decision is a big part of our military culture. So much so that debriefing is an art that you get graded on. In flight school and all the way through the squadron . . . there are numerous questions regarding a person's ability to debrief himself and to debrief others."

Explaining away a bad decision is unacceptable. "Defending stuff that you've done is just not popular. If you screwed up, your job is to show the lessons you've learned. n.o.body learns from someone who is being defensive."

Nor is the purpose of debriefings simply to admit mistakes. Rather, the effect of the debriefing system is that pilots learn that mistakes are acceptable, provided they are used as opportunities to improve individual and group performance. This emphasis on useful, applicable lessons over creating new formal doctrines is typical of the IDF. The entire Israeli military tradition is to be traditionless. Commanders and soldiers are not to become wedded to any idea or solution just because it worked in the past.

The seeds of this feisty culture go back to the state's founding generation. In 1948, the Israeli army did not have any traditions, protocols, or doctrines of its own; nor did it import inst.i.tutions from the British, whose military was in Palestine before Israel's independence. According to military historian Edward Luttwak, Israel's was unlike all postcolonial armies in this way. "Created in the midst of war out of an underground militia, many of whose men had been trained in cellars with wooden pistols, the Israeli army has evolved very rapidly under the relentless pressure of bitter and protracted conflict. Instead of the quiet acceptance of doctrine and tradition, witnessed in the case of most other armies, the growth of the Israeli army has been marked by a turmoil of innovation, controversy, and debate."

Furthermore, after each of its wars, the IDF engaged in far-reaching structural reforms based on the same process of rigorous debate.

While the army was still demobilizing after the 1948 War of Independence, Ben-Gurion appointed a British-trained officer named Haim Laskov to examine the structure of the IDF. Laskov was given a blank check to restructure the army from the ground up. "While such a total appraisal would not be surprising after a defeat," Luttwak explained to us, "the Israelis were able to innovate even after victory. The new was not always better than the old, but the flow of fresh ideas at least prevented the ossification of the military mind, which is so often the ultimate penalty of victory and the cause of future defeat."13 The victory in the 1967 Six-Day War was the most decisive one Israel has ever achieved. In the days before the war, the Arab states were openly boasting that they would be triumphant, and the lack of international support for Israel convinced many that the Jewish state was doomed. Israel launched a preemptive attack, destroying the entire Egyptian air force on the ground. Though the war was called the Six-Day War, it was essentially won on that first day, in a matter of hours. By the end, the Arab states had been pushed back on all fronts.

And yet, even in victory, the same thing happened: self-examination followed by an overhaul of the IDF. Senior officials have actually been fired after a successful war.

It should not be surprising, then, that after more controversial wars-such as the 1973 Yom Kippur War, the 1982 Lebanon war, and the 2006 Lebanon war, which most Israelis perceived as having been seriously botched-there were full-blown public commissions of inquiry that evaluated the country's military and civilian leaders.

"The American military does after-action reports inside the military," military historian and former top U.S. State Department official Eliot Cohen told us. "But they are cla.s.sified. A completely internal, self-contained exercise. I've told senior officers in the U.S. military that they would well benefit from an Israeli-like national commission after each war, in which senior ranks are held accountable-and the entire country can access the debate."14 But that's not going to happen anytime soon, much to the frustration of U.S. Army Lieutenant Colonel Paul Yingling. "We've lost thousands of lives and spent hundreds of billions of dollars in the last seven years in efforts to bring stability to two medium-sized countries; we can't afford to adapt this slowly in the future,"15 he said in a lecture at the marine base at Quantico, Virginia. The problem, he wrote in a controversial essay in 2007, is that "a private who loses a rifle suffers far greater consequences than a general who loses a war." he said in a lecture at the marine base at Quantico, Virginia. The problem, he wrote in a controversial essay in 2007, is that "a private who loses a rifle suffers far greater consequences than a general who loses a war."16 The Israelis, on the other hand, have been so dogmatic about their commissions that one was even set up in the midst of an existential war. In July 1948, in what Eliot Cohen described as "one of the truly astonishing episodes" of Israel's War of Independence, the government established a commission staffed by leaders from across the political spectrum while the war was still going on. The commission stepped back for three days to hear testimony from angry army officers about the government and the military's conduct during the war and what they believed to be Ben-Gurion's micromanagement.17 Setting up a commission amid the fighting of a war was a questionable decision, given the distraction it would impose on the leadership. But, as Yuval Dotan told us earlier, in Israel the debrief is as important as the fighting itself. Setting up a commission amid the fighting of a war was a questionable decision, given the distraction it would impose on the leadership. But, as Yuval Dotan told us earlier, in Israel the debrief is as important as the fighting itself.

This rigorous review and national debrief was in full public display as recently as the 2006 Lebanon war. Initially, there was almost unanimous public backing for the government's decision to respond ma.s.sively to the attack by Hezbollah from across Israel's northern border on July 12, 2006. This public support continued even when civilians in northern Israel came under indiscriminate missile attack, forcing one out of seven Israelis to leave their homes during the war.

Support for continuing the offensive was even higher among those living under the missile barrage than in the rest of Israel. This support presumably came from an Israeli willingness to suffer in order to see Hezbollah destroyed for good.

But Israel failed to destroy Hezbollah in 2006, and was unable to weaken Hezbollah's position in Lebanon and to force the return of kidnapped soldiers. The reaction against the political and military leadership was harsh, with calls for the defense minister, IDF chief of staff, and prime minister to step down. Six companies of troops (roughly six hundred soldiers) were able to kill some four hundred Hezbollah fighters in face-to-face combat while suffering only thirty casualties, but the war was considered a failure of Israeli strategy and training, and seemed to signal to the public a dangerous departure from the IDF's core ethos.

Indeed, the 2006 Lebanon war was a case study in deviation from the Israeli entrepreneurial model that had succeeded in previous wars. According to retired general Giora Eiland, who has headed both the prestigious IDF Planning Branch and the National Security Council, the war underscored four princ.i.p.al IDF failures: "Poor performance by the combat units, particularly on land; weakness in the high command; poor command and control processes; and problematic norms, including traditional values." In particular, Eiland said, "open-minded thought, necessary to reduce the risk of sticking to preconceived ideas and relying on unquestioned a.s.sumptions, was far too rare."

In other words, Israel suffered from a lack of organization and and a lack of improvisation. Eiland also noted that soldiers were not sufficiently instilled with "the sense that 'the fate of the war is on our shoulders.' " Commanders "relied too much on technology, which created the impression that it was possible to wage a tactical land battle without actually being in the field." a lack of improvisation. Eiland also noted that soldiers were not sufficiently instilled with "the sense that 'the fate of the war is on our shoulders.' " Commanders "relied too much on technology, which created the impression that it was possible to wage a tactical land battle without actually being in the field."

Finally, Eiland leveled a criticism that is perhaps quintessentially Israeli and hardly imaginable within any other military apparatus: "One of the problems of the Second Lebanon War was the exaggerated adherence of senior officers to the chief of staff's decisions. There is no question that the final word rests with the chief of staff, and once decisions have been made, all must demonstrate complete commitment to their implementation. However, it is the senior officers' job to argue with the chief of staff argue with the chief of staff when they feel he is wrong, and this should be done a.s.sertively on the basis of professional truth as they see it" (emphasis added). when they feel he is wrong, and this should be done a.s.sertively on the basis of professional truth as they see it" (emphasis added).

Large organizations, whether military or corporate, must be constantly wary of kowtowing and groupthink, or the entire apparatus can rush headlong into terrible mistakes. Yet most militaries, and many corporations, seem willing to sacrifice flexibility for discipline, initiative for organization, and innovation for predictability. This, at least in principle, is not the Israeli way.

Eiland suggested that the IDF should consider drastic measures to reinforce its cla.s.sic antihierarchical, innovative, and enterprising ethos. "Is it correct or even possible," he asked, "to allow lower-ranking officers to plan and lead current security operations with less control from above with less control from above in order to prepare them better for a conventional war?" (emphasis added). in order to prepare them better for a conventional war?" (emphasis added).18 The 2006 war was a very costly wake-up call for the IDF. It was suffering from an ossification and hollowing out that is common among militaries that have not been tested in battle in a long time. In Israel's case, the IDF had shifted its focus to commando-style warfare, which is appropriate when pursuing terrorist groups, but had neglected the skills and capabilities needed for conventional warfare.

Yet the Israeli reaction was not so much a call to tighten the ranks as it was to loosen them: to work harder at devolving authority and responsibility to lower levels and to do more to encourage junior officers to challenge their higher-ups. This radical push, moreover, was seen as one of restoring the "core values," not liberalizing them.

What does all this mean for a country like Singapore, trying not just to emulate Israel's military structure but to inject some of Israel's inventiveness into its economy, as well? As noted above, Singapore differs dramatically from Israel both in its order order and in its insistence on and in its insistence on obedience obedience. Singapore's politeness, manicured lawns, and one-party rule have cleansed the fluidity from its economy.

Fluidity, according to a new school of economists studying key ingredients for entrepreneurialism, is produced when people can cross boundaries, turn societal norms upside down, and agitate in a free-market economy, all to catalyze radical ideas. Or as Harvard psychologist Howard Gardner puts it, different types of "asynchrony . . . [such as] a lack of fit, an unusual pattern, or an irregularity" have the power to stimulate economic creativity.19 Thus, the most formidable obstacle to fluidity is order. A bit of mayhem is not only healthy but critical. The leading thinkers in this area-economists William Baumol, Robert Litan, and Carl Schramm-argue that the ideal environment is best described by a concept in "complexity science" called the "edge of chaos." They define that edge as "the estuary region where rigid order and random chaos meet and generate high levels of adaptation, complexity, and creativity."20 This is precisely the environment in which Israeli entrepreneurs thrive. They benefit from the stable inst.i.tutions and rule of law that exist in an advanced democracy. Yet they also benefit from Israel's nonhierarchical culture, where everyone in business belongs to overlapping networks produced by small communities, common army service, geographic proximity, and informality.

It is no coincidence that the military-particularly the elite units in the air force, infantry, intelligence, and information technology arenas-have served as incubators for thousands of Israeli high-tech start-ups. Other countries may generate them in small numbers, but the Israeli economy benefits from the phenomena of rosh gadol rosh gadol thinking and critical rea.s.sessment, undergirded by a doctrine of experimentation, rather than standardization, wide enough to have a national and even a global impact. thinking and critical rea.s.sessment, undergirded by a doctrine of experimentation, rather than standardization, wide enough to have a national and even a global impact.

PART III.

Beginnings

CHAPTER 6.

An Industrial Policy That Worked

It was not simple to convince people that growing fish in the desert makes sense.

-PROFESSOR S SAMUEL A APPELBAUM THE STORY OF HOW I ISRAEL got to where it is-fiftyfold economic growth within sixty years-is more than the story of Israeli character idiosyncrasies, battle-tested entrepreneurship, or geopolitical happenstance. The story must include the effects of government policies, which had to be as adaptive as Israel's military and its citizens, and suffered as many turns of fortune. got to where it is-fiftyfold economic growth within sixty years-is more than the story of Israeli character idiosyncrasies, battle-tested entrepreneurship, or geopolitical happenstance. The story must include the effects of government policies, which had to be as adaptive as Israel's military and its citizens, and suffered as many turns of fortune.

The history of Israel's economy is one of two great leaps, separated by a period of stagnation and hyperinflation. The government's macroeconomic policies have played an important role in speeding the country's growth, then reversing it, and then unleashing it in ways that even the government never expected.

The first great leap occurred from 1948 to 1970, a period during which per capita GDP almost quadrupled and the population tripled, even amidst Israel's engagement in three major wars.1 The second was from 1990 until today, during which time the country was transformed from a sleepy backwater into a leading center of global innovation. Dramatically different-almost opposite-means were employed: the first period of expansion was achieved through an entrepreneurial government that dominated a small, primitive private sector; the second period through a thriving entrepreneurial private sector that was initially catalyzed by government action. The second was from 1990 until today, during which time the country was transformed from a sleepy backwater into a leading center of global innovation. Dramatically different-almost opposite-means were employed: the first period of expansion was achieved through an entrepreneurial government that dominated a small, primitive private sector; the second period through a thriving entrepreneurial private sector that was initially catalyzed by government action.

The roots of the first period of economic growth can be traced to well before the country's founding-all the way back to the late nineteenth century. For example, in the 1880s, a group of Jewish settlers tried to build a farming community in a new town they had founded- Petach Tikva-a few miles from what is now Tel Aviv. After first living in tents, the pioneers hired local Arab villagers to build mud cabins for them. But when it rained the cabins leaked even more than the tents, and when the river swelled beyond its banks, the structures melted away. Some of the settlers were struck by malaria and dysentery. After just a few winters, the farmers' savings had been exhausted, their access to roads washed out, and their families reduced to near starvation.

In 1883, though, things began to look up. The French-Jewish banker and philanthropist Edmond de Rothschild provided desperately needed financial support. An agricultural expert advised the settlers to plant eucalyptus trees where the river's overflow created swamps; the roots of these trees quickly drained the swamps dry. The incidence of malaria dropped dramatically, and more families came to live in the growing community.2 Beginning in the 1920s and continuing through the decade, labor productivity in the Yishuv-the Jewish community of pre-state Palestine-increased by 80 percent, producing a fourfold increase in national product as the Jewish population doubled in size. Strikingly, as a global depression raged from 1931 to 1935, the average annual economic growth for Jews and Arabs in Palestine was 28 and 14 percent, respectively.3 The small communities established by settlers, like those of Petach Tikva, would never have been able to achieve such explosive growth on their own. They were joined by waves of new immigrants who contributed not only their numbers but a pioneering ethos that overturned the charity-based economy.