Caste and Ethnicity still matter for Business in India

Ample research has shown that informal connections between people have a substantial influence on economic life, in terms who deals with whom and how well they perform. We call this “social embeddedness”, meaning that we are all embedded to different degrees in various networks of people, which influences our behaviour and success. One dimension which in a business context has received a lot of research is whether people have a joint educational background, particularly whether they are alumni from the same academic institution.

Guoli Chen, Ravee Chittoor and Bala Vissa thought that this embeddedness research that is focused on educational background could perhaps be especially valid in a Western context (where most of the research has taken place) but that in a different context, such as India, different types of affiliations might also play an important role. Specifically, they wanted to focus on the role of caste (i.e. people being of the same or different castes) and language (in terms of people sharing the same regional dialect).

Research setting: Equity analysts in India
To examine these different dimensions of inter-personal networks, they focused on a particular set of people and relationships, namely equity analysts. Firms listed on the stock exchange will often be followed and evaluated by analysts, as employed by banks, who make buy and sell recommendations to the public regarding the company’s stock.

Perhaps the most important task of such an equity analyst is to forecast – as accurately as possible – the future earnings of the firm. However, to make an accurate forecast, an analyst often has to at least partly rely on information received directly from the company; not seldom in the form of personal conversations with the Chief Executive. And Guoli, Ravee and Bala suspected that when the analyst happened to share the same background with the company’s CEO it would be much easier for him or her to get access to the CEO and his company information; making his earnings forecasts more accurate.

Findings
They tested this suspicion on a sample of 141 Indian firms, followed by a total of 296 equity analysts, between 2001-2010. First of all, they found clear evidence that equity analysts that are alumni of the same academic institution as the company’s CEO were indeed able to make much more accurate forecasts. But, in addition, the same was true for analysts who shared the same background in terms of caste, and in terms of regional language.  In fact, the effects were roughly the same size, meaning that these old historical patterns (around caste and language) were just as important in India as the more contemporary ones (i.e. university affiliation).

They then examined the conditions under which these different types of informal ties mattered more or less or whether such ties were indeed always beneficial. They found that older CEOs – who could be expected to be influenced more heavily by traditional patterns – were more susceptible to issues of caste and language than younger CEOs. They were less influenced by joint academic affiliation. Hence, although these old historical patterns matter a lot in India; they matter less for younger people, who are relatively more susceptible to joint academic affiliation.

In addition, they found evidence that these informal relationships were particularly beneficial if it concerned a truly Indian firm (part of a traditional business group). In contrast, such informal ties hurted more than they helped, when the firm in question was an Indian subsidiary of a Western multinational corporation.

Overall, what Guoli, Ravee and Bala’s research shows is that, in a country like India, old historical social structures still matter a lot in the world of business, especially when it concerns firms that are part of a traditional business group. The effect of language (which is analogous to ethnicity) was particularly potent. These effects may begin to matter a bit less for younger people (i.e. since they were especially strong for older CEOs) but they still wield considerable influence on economic life.


Paper presented at the “Sumantra Ghoshal Conference for Managerially Relevant Research” at the London Business School.
Which old boy network matters? Basis of social affiliation and the accuracy of equity analysts’ earnings forecast of Indian firms. Guoli Chen (INSEAD), Ravee Chittoor (Indian School of Business), Bala Vissa (INSEAD)
This paper summary is published with permission from the authors.

 

Antiquated & to be Annihilated? Is an On-line Revolution Brewing in Business Education?

We hear more and more talk about how the traditional model of business schools will be annihilated by the disruptive innovation of on-line education, so-called MOOCs (massive open on-line courses). An increasing number of voices can be heard to proclaim that business schools with their lectures and study groups are doomed, antiquated, overpriced, and that people who doubt that are just in denial and one day will wake up finding themselves obsolete and plain wrong.

And, arguably, case studies on the effects of disruptive innovation conducted in industries ranging from airlines and newspapers to photography and steel mills, have shown that often the established players in the market are initially in denial, slow to react, suffering from hubris and, eventually, face crisis and extinction.

Yet, when it comes to on-line education, and its potentially disruptive influence on higher education, including business schools, I doubt that on-line education will replace face-to-face lectures and study groups.

The arguments that people use to proclaim that traditional business schools will be replaced by on-line education include the notions that it is much cheaper, can be more easily accessed by a much wider audience, and customers (students) can access the materials wherever and whenever they want.

And this just reminds me of the printing press.

Oral lectures have been around since the times of Socrates and Plato. I am sure when the printing press was invented and became more widespread and accessible, an increasing number of voices could be heard to proclaim that such lectures and schools were going to be replaced by books. That is because books are much cheaper, can be more easily accessed by a much wider audience, and students can access them wherever and whenever they want. But they did not replace face-to-face lectures and study groups.

And that is because books and on-line educational resources offer something very different than the traditional lectures and school community. They are complements rather than substitutes. Of course the arrival of the printing press quite substantially changed schools and education; business schools without books would be very different than they are today. Hence, it would be naïve to think that on-line resources are not going to alter traditional business school education; they will and they should. Business schools better think hard how they are going to integrate on-line education into their courses and curricula.

But this means that it offers opportunities rather than a threat. And research on the effects of disruptive innovation – for example in newspapers – has also shown that established players who treat the arrival of a new technology as an opportunity, rather than as direct substitute, are the ones that are most likely to survive and prosper.

Freek Vermeulen is an Associate Professor of Strategy and Entrepreneurship at the London Business School. In 2012, BestOnlineUniversities elected him number 1 in their global list of “top 100 web-savvy professors”. You can find him on-line at www.freekvermeulen.com and at @Freek_Vermeulen. He regularly blogs for Forbes, the Harvard Business Review and The Ghoshal Blog.

The Structure of Competition: How Hidden Patterns Drive Firm Behaviour

In our behaviour and beliefs, we are influenced by various hidden structures and characteristics of the people surrounding us. Over the past decades, for example, hundreds of studies on social networks and "small worlds" have shown that with whom you have had prior relationships, and how these people relate to each other, influences the information we receive, how much personal power we have, how likely we are to find a job, get promoted, how creative and innovatie we are, and so forth.

This research on social networks basically draws lines between you and the people you know, and lines between those people you know who also know each other; lines between them and other people you don't know at all, etcetera, to reveal very different structures. We call these structures networks with or without "structural holes", with more or less "indirect ties", "network closure", and so on.

Ample research has also revealed that, just like individuals, the same type of structures influence firms in their behaviour and performance. In this case, the lines between different firms - referred to as "social ties" - can be determined by prior alliances between these companies, or shared members of their boards of directors (so-called board interlocks), or some other cooperative tie. Firms may not always realise it, but their strategic choices and success can be heavily infuenced by these social networks.

What a former PhD student of mine - Kai-Yu Hsieh (now an assistant professor at the National University of Singapore) - and I did is similar but also very different from this social network research. We started to draw lines between the different firms in an industry, not based on "social ties" but based on who competes with whom. Some firms in an industry namely compete directly with each other where others don't. For example, in the pharmaceutical industry, a firm making anti-epileptic drugs and cardiovascular drugs would be competing with another firm that makes cardivascular drugs but not with a firm that makes antibiotics medicine. The firm's competitors, however, could also be competing with each other, for instance if both also happened to make cancer drugs. The point is that, drawing lines between the different firms in various industries also revealed remarkably different structures - just like social networks do. And we wanted to find out if organizations, in their behaviour, are also influenced by such competitive structures; which we labeled "the structure of competition".

And the answer is "oh yes".

We deliberately selected two very different industries for which to compute these competitive structures. We analysed whom competes with whom among computer hardware manufacturers in Taiwan. And we computed the exact same structures for pharmaceutical firms in China. The type of strategic behaviour that we chose to analyse through these competitive structures was imitative market entry: how inclined would these firms be, dependent on their structure of competition, to follow each other into new markets? Or might certain type of structures induce them not to imitate each other at all, and in fact stay out of certain markets altogether?

Remarkably, in these very different industries the exact same types of competitive structures led to the exact same types of strategic behaviour. And the influence of the structure of competition was substantial: firms could display completely opposite behaviour when facing different structures (flipping from a strong inclination to imitate to an inclination to do the opposite of others).

We interviewed people in these industries to find out why these structures were influencing their behaviour so heavily. The first thing we found out was that, in spite of their strong influence, managers were not aware of the different type of structures. But they were aware of their influence. Our interviews suggested that operating within a particular structure seemed to leave a particular "imprinting effect" on a firm, making it more or less aggressive in its market behaviour and towards its competitors.

In this study, we analyzed the strong influence of these hidden structures of competition on firm's imitative market entry behaviour, but it seems likely that - just as in the case of social networks - they might heavily influence a whole range of other strategic variables and behaviours. Hence, we see our research - due to appear in the academic journal Organization Science - as just a first step to uncovering the hidden influence of the structure of competition on economic life.

Corporate Strategy? You Shouldn’t Even Try

Most corporations consist of multiple divisions. These divisions, which set their own strategy (what we generally refer to as “business strategy”), more often than not have very little to do with one another. Take Philips Electronics with its lighting, medical equipment, and consumer electronics; ThyssenKrupp with steel, elevators, and engineering services; or smaller companies such as Trinity Mirror with newspapers, printing, and digital services. They may not be like the conglomerates of the 1960s – you can see how their portfolio of somewhat related business came about – but, in reality, the various divisions and business units do operate completely independently from one another.

Yet, corporate top management invariably tries hard to formulate an overarching strategy. It endeavors to stimulate cooperation across divisions (by repeatedly shouting really loudly that this should happen), sets up corporate shared services (which invariably are seen as a mere cost and nuisance by its divisional heads), and have some abstract talk about creating “cross-divisional synergies”.

And I say, don’t even go there; don’t even try.

It’s not worth it; it’s artificial; it won’t work (because it never does); and, most of all, there’s just no need for it. Just forget about it.

“But, what then could possibly be the rationale and justification for these various business to be together in one corporation?!” I hear a cacophony of voices – of analysts, investors, board members, and business school professors – shout. “There must be something; otherwise the corporation should be broken up, because shareholders can do the diversification themselves”. It is firmly rooted in our minds that there must be some sort of a rationale for why these various businesses are grouped together into one firm.

And that’s right; there is a rationale. But seeing it requires a significant change of mindset of what a corporation is and does, and should do.

Once companies grow they often start moving into adjacent business areas. For example, a company may have moved from steel into engineering products because they require steel, then moved into engineering services, and became big in elevators causing them to set up a separate division for that too. These four divisions set their own strategy – e.g. the business strategy for engineering services, the strategy for elevators, etcetera – and have their own management teams and P&L.

Any corporate finance course will then tell you – probably on day one – that somehow these four divisions must create extra value by being grouped together; otherwise they should be split up into four separate companies, because you then save the costs of an expensive corporate head office, and investors themselves can easily do the diversification across different businesses – including these four – better, cheaper, and more customized to their own needs.

And therefore corporate top management teams come up with some contrived idea of a joint strategy to suggest synergies and justify their own existence.

But what the real value of a corporate top management is – or can be – is very different from all these things, but it requires these people to see their task and themselves in a different light: corporations are not there to set strategy, but they simply exist as investment vehicles, with the senior executives as its managers. Overall, I see three related roles for them:

1) First, corporate C-suite executives are portfolio managers. But they differ from fund managers and alike in a significant way; they actually know the business. Fund managers, equity analysts, hedge fund managers, and so on can analyze the numbers perfectly well and listen to the powerpoint presentation of the CEO on its roadshow. But corporate executives, who may have grown up in the business, work on it every day, and have an authoritative relationship with their divisional managers are better able to really grasp the in-depth and tacit aspects of the business’ strategy and competitive advantage. This makes them better portfolio managers, in the sense that they see things that external investors miss. Analysts are easily fooled by nice numbers and charismatic CEOs; the Goldman Sachs analysts who wrote “Enron is still the best of the best. We recently spoke with most of top management; our confidence level is high” a mere six weeks before it filed for bankruptcy still come to mind.

2) From this also follows their second role: they can play the role of a board of directors – but then better informed. In reality, boards are severely limited in terms of their knowledge of the corporation they are governing – not the least because external directors are of course no more than a collection of part-timers and amateurs. It is nearly impossible to really grasp the inner workings of a multinational, diversified corporation for an outsider who spends a couple of days per year on it. The top management of the corporation can really conduct this task; hence, they are probably the company’s real governance mechanism, assuring that shareholders’ money is spent wisely, strategies are genuinely set, and the numbers justified. Moreover, unlike boards, they can staff the divisional management teams with people they actually know and select.

3) Finally, a corporation’s head office can provide funds, much like an in-house bank. This might sound trivial, because lots of parties can provide money, but the advantage is again the superior insider knowledge and accompanying speed of operation. For example, where it is well-known that the majority of public acquisitions destroy value, research by professor Laurence Capron from INSEAD shows that private deals, on average, do create value. Most companies in the world are private but, unlike public firms, there is not a lot of information about them available. Therefore, it requires someone knowledgeable of the business to identify attractive targets, and be able to make the funds swiftly available. The top management of corporations can provide such insight, funds, and speed of allocation. Which gives a business that is part of larger, well-endowed corporation a potential advantage. Hence, a corporation’s top management team is a way to internalize portfolio management, governance, and resource allocation.

I often attend yearly conferences of corporations in which they bring together their top 50 or 100 executives to discuss the corporation’s strategy (which invariably is a mixture of amorphous capability statements and financial goals, i.e. not really a strategy), proclaim once more the need for cross-divisional synergies and cooperation, and listen to some keynote speaker (such as yours truly) in an attempt to provoke ideas on how to achieve this. Stop doing this I’d say (including the keynote speaker). There is no need for an overarching corporate strategy. It is invariably contrived, never creates any real value, and is simply not necessary.

Corporations comprising different businesses in separate divisions can exist for good reason. Creating corporate strategy is not needed for such corporations to rightfully exist. It does require a fundamental rethink of what your corporation is for, and what you – as corporate manager – are for. Understanding the real advantage of corporations is paramount to making them work. It usually means getting out of the way of divisional strategy, rather than trying to set it.

Strategy is Necessary but not Sufficient

For those of you out there who like to gleefully smirk about “strategy”; let me explain it immediately here at the start (and hopefully once and for all): Strategy is a necessary condition for success. But it is not a sufficient condition – we (strategy professors) are not that stupid.

I’ll explain in a sec exactly what we mean by that – a necessary but not sufficient condition – but let me first explain the gleeful smirk.

I again saw it last November, when the Monitor Group went bankrupt. The Monitor Group was a strategy consulting firm founded by Harvard Business School’s Michael Porter; seen by many as the founding father of the field of business strategy.

When it went bankrupt I was gleefully approached by various people in various corridors making gleeful remarks that this strategy consultant’s strategy could not even save itself, and the famous strategy guru Michael Porter couldn’t even put together a company that made enough money to pay the rent. With the underlying ergo: see, this strategy stuff does not really work.

Let me now move on to the necessary but not sufficient condition thing: When a company has a good strategy – even a great strategy – it can still fail. Yes, fail. It can still fail because to be a success in business you need lots of other things besides a good strategy: you still need to be able to get the technology you envisioned, to motivate your people, forge and nurture customer relations, get the right financing, and so on and so on. There are lots of other things you need to be good at, in addition to strategy, before your company will become a success. You can have an excellent strategy in mind but if you mess up in these other areas you will go down nonetheless.

Hence, having a good strategy is not sufficient to becoming a success.

But it is a necessary condition. What we mean by that is that even if you’re good at absolutely everything – developing technology, motivate your people, forge and nurture customer relations, and get the right financing – but your strategy sucks, in terms of what you are actually trying to accomplish in the market place, you will be (to use a good English expression) flogging a dead horse.

You can flog all you want, but without the right strategy it is all wasted energy and other resources; it ain’t going to work. The beast isn’t going to jump up and run.

I have seen various CEOs who were really great business leaders, in the sense that they were charismatic, structured, genuine people-managers, politically astute, and so on, but who were trying to build a company on what was basically a flawed idea: a strategy that was never going to work. They were still great CEOs – nobody can be good at everything – but without a great strategy no CEO can build a great company. In which case you’re better off outsourcing your strategy development to someone else; even if that someone else is the Monitor Group or Michael Porter.

I like strategy, and I think it is really important. But I am not daft enough to think that all you need is a good strategy and all will be well. But at least your horse will be running.

Fraud or apathy: What is academia’s biggest threat?

Diederik Stapel committed a truly massive fraud. And he wasn’t even very good at it. As we know now, he completely made up the data of many – and probably most – of his (very prominent) academic publications.

I have written about him before, because obviously he forms both a fascinating and worrying case. It is worrying not because it makes me suspect there are probably more of such massive fraud cases that currently remain undetected – his fraud was so huge that I have trouble imagining – perhaps naively – that it is not unique. However, I have much less trouble imagining that for every case like Stapel’s, there are probably many more of much smaller fraud, which could easily add up to something even bigger.

Stapel made up all his data regarding pretty much all his publications – and got away with it for a long time. How many people might there be out there who make up only parts of their data for some of their publications…?

It is like cases of insider trading, or rogue investment bank traders; the cases that come out in the open are often colossal cases of fraud (although there is a bit of attention bias), involving billions of pounds, not seldom committed in a rather clumsy way. For every immense, clumsy case of insider trading, how many smaller, more sophisticated villains might there be…?

But there is another reaction to the Stapel fraud that makes me worried. Newspapers that reported on and described his fraud often gave examples of his experiments. For example, he would predict and “find” that people exposed to the world “capitalism” in an experiment would be less inclined to share their M&Ms with others and, instead, selfishly stuff them into their own drooling mouths.

On newspaper websites, people would comment on these articles, and their reactions were remarkably consistent; they never said “tsss, he committed fraud with something as important like that…” (a reaction I imagine they would have had had it concerned a clinical trial of a new cancer drug); invariably, their reaction would be “that’s what these scientists spend our tax money on?! silly things like that!?” and “that’s the kind of stuff that makes someone a famous professor?!”

People seem to not care at all that he made up his data because, to them, it concerned stuff they find completely trivial, irrelevant and infantile. They are not outraged by his fraud; they couldn’t care less.

Now, I am not saying I completely agree with them (I would find it interesting – and potentially even important – if putting people in a capitalist frame of mind would automatically make them act more selfishly) but I am wondering whether apathy and an active disinterest might not be even more threatening to the long-term prospects of social psychology as a field than fraud. To the general audience, their research appears trivial and unimportant.

Stapel has now written a book – I guess largely because he simply needs the money, now that his career prospects in academia have been truncated – detailing his descent into fraud. Perhaps in his next book he can tell us – and the world at large – why his experiments would have been important and worth doing (for real). And hence why people should be outraged by his fraud, because currently, they’re not.

Do Firms Trust Universities?

Earlier this week, I attended a seminar at the London Business School by Michaël Bikard – a PhD candidate at MIT – who presented his research on technological inventions. Such inventions are, of course, often patented. Examining these patents allowed Michaël to determine on which technological breakthrough discoveries these inventions were based. Hence, these inventions are basically commercial applications of the more fundamental discoveries.

Fairly regularly, a university or a firm builds on and commercializes its own discoveries but, quite often, such an organisation may also be building on the discoveries of others. That is possible because such fundamental discoveries will often be published, in academic journals such as Nature or Science, and hence are accessible to everyone. And that’s when it gets interesting; because on whose discoveries are firms more likely to build when working on applied inventions: on the discoveries of universities or of other companies?

It matters where a discovery was made

Past research on the topic has basically been comparing apples and oranges, because the discoveries coming out of universities are often fundamentally different from the breakthroughs achieved in firms. Michaël, however, wanted to know whether it mattered to companies where the breakthrough had taken place – regardless of the actual content of the breakthrough. Therefore, he analysed a unique yet fascinating set of technological discoveries, namely the instances where the exact same breakthrough happened at the exact same time in a university and in a firm.

This happens surprisingly often. For example, in the winter of 1999, two teams of scientists simultaneously discovered VR1 (vanilloid receptor1), the receptor for the pain caused by excessive heat. The first team of scientists – who published the finding in Science in May 2000 – was from the University of California in San Francisco. The second team, however, worked at SmithKline Beecham. Hence, the same idea originated simultaneously in a university and in a firm. In total, there were 39 of such simultaneous discoveries in firms and universities between 1970 and 2009.

Then, through patent analysis, Michaël tracked all commercial inventions that built on one of the 39 fundamental discoveries, such as VR1. And he found out that the patenting companies much more often had picked up on the discovery from the publication by the firms. Now, note that these companies could have picked up on the exact same idea from the publication by the universities, but they didn’t – apparently companies scanning for fundamental knowledge pay more attention to the discoveries of other firms. In comparison, they don’t bother with stuff coming out of universities. And that begs the question: why?

Firms do not monitor universities

Why do firms not pay attention to the discoveries by universities? It’s not about the content of the discovery; that, in this case, is the exact same thing. To find out, Michaël started interviewing people; the R&D folk that had worked on the commercial inventions.

And they confirmed that they basically did not bother much looking at the stuff coming out of universities. The first reason is because that is simply what companies are used to doing: indeed, most firms I know obsessively monitor their competitors, so if such a competitor comes up with a new discovery, they will notice. They don’t habitually look at universities. Therefore, they miss stuff. And that’s their loss.

The second reason is more worrying (at least, to me, as an academic): The interviewees proclaimed that they don’t pay much attention to the publications about fundamental discoveries by universities because they don’t trust them. Some feel that academics are too heavily incentivised and put under pressure to publish stuff; i.e. the infamous “publish or perish” culture. This, in their view, increases the chance that the publications are dubious, flawed, or outright fraudulent. And they’re not taking any chances with them.

One inventor proclaimed: “It’s a much higher bar [for industry], higher standards, because every error, or every piece of fraud along the way, the end game is going to fail. … Therefore, I have more faith in what industry puts out there as a publication”. Firms don’t pay attention to published discoveries by universities because they think chances are that it is bogus.

I remember that the company MORI used to run surveys on “who do you trust?” – and they probably still do – dividing, among others, the results by profession. Ten years ago, priests and professors used to come out on top; businessmen and politicians near the bottom. I don’t know exactly what people nowadays think of the trustworthiness of businessmen and politicians, but I have a fair idea what happened to the faith in priests and professors.

Which Best Practice Is Ruining Your Business?

For many decades, newspapers were big; printed on the so-called broadsheet format. However, it was not cheaper to print on such large sheets of paper  – that was not the reason for their exorbitant size – in fact, it was more expensive, in comparison to the so-called tabloid size. So why did newspaper companies insist on printing the news on such impractical, large sheets of paper? Why not print it on smaller paper? Newspaper companies, en masse, assumed that “customers would not want it”; “quality newspapers are broadsheet”.

When finally, in 2004, the United Kingdom’s Independent switched to the denounced tabloid size, it saw its circulation surge. Other newspapers in the UK and other countries followed suit, boosting their circulation too. Customers did want it; the newspaper companies had been wrong in their assumptions.

When I looked into where the practice had come from – to print newspapers on impractically large sheets of paper – it appeared its roots lay in England. In 1712, the English government started taxing newspapers based on the number of pages that they printed. In response, companies made their newspapers big, so that they could print them on fewer pages. Although this tax was abolished in 1855, companies everywhere continued to print on the impractical large sheets of paper. They had grown so accustomed to the size of their product that they thought it could not be done any other way. But they were wrong. In fact, the practice had been holding their business back for many years.

Everybody does it

Most companies follow “best practices”. Often, these are practices that most firms in their line of business have been following for many years, leading people in the industry to assume that it is simply the best way of doing things. Or, as one senior executive declared to me when I queried one of his company’s practices: “everybody in our business does it this way, and everybody has always been doing it this way. If it wasn’t the best way of doing things, I am sure it would have disappeared by now”.

But, no matter how intuitively appealing this may sound, the assumption is wrong. Of course, well-intended managers think they are implementing best practices but, in fact, unknowingly, sometimes the practice does more harm than good.

One reason why a practice’s inefficiency may be difficult to spot is because when it came into existence, it was beneficial – like broadsheet newspapers once made sense. But when circumstances have changed and it has become inefficient, nobody remembers, and because everybody is now doing it, it is difficult to spot that doing it differently would in fact be better.

The short term trap

Some bad practices may also come into existence being bad, but the harmful effects only materialize years after their implementation. And firms implement them because its short-term consequences are quite positive.

For example, in a project with Mihaela Stan from University College London, we examined the success rate of fertility clinics in the UK. A number of years ago, various clinics began to test, select, and only admit patients for their IVF treatment who were “easy cases”; young patients with a relatively uncomplicated medical background. Indeed, treating only easy patients boosted the clinics’ success rates – in terms of the number of pregnancies resulting from treatment – which is why more and more firms started doing it. However, our research on the long-term consequences of this practice clearly showed that selecting only easy patients made them all but unable to learn and improve their treatment and success rate further. Clinics that did do a fair proportion of difficult cases learnt so much from them that after a number of years their success rates became much higher – in spite of treating a lot of difficult patients – than the clinics following the selection practice. Unknown to the clinics’ management, the seemingly clever practice put them on the back foot in the long run.

What this example shows is that the long-term negative consequences of a seemingly “best practice” can sometimes greatly outweigh its short-term benefits. But the problem is that, where managers can see the beneficial short-term effects, they often are unable to understand, when after a number of years their competitive position starts plummeting, that this is due to this “best practice” they implemented years ago. Therefore, the practice persists, and may even spread further to other organizations in the same line of business.

Self-perpetuating myths

What makes some seemingly best practices even more difficult to uncover as harmful is that they can become self-perpetuating. Take the film industry. Film distributors have preconceived ideas about which films will be successful. For example, it is generally expected that films with a larger number of stars in them, actors with ample prior successes, and an experienced production team will do better at the box office.

Sure enough, usually those films have higher attendance numbers. However, professors Olav Sorenson from Yale and David Waguespack from the University of Maryland discovered that, because of their beliefs, film distributors assign a much bigger proportion of their marketing budget and other resources to those films. Once they acknowledged this factor in their statistical models, it became evident that those films, by themselves, did not do any better at all. The distributors' beliefs were a complete myth, which they subsequently made come true through their own actions. However, the film distributors would have been better off had they assigned their scarce resources differently.

Most experienced executives have strong beliefs about what works and not, and logically they assign more resources and put more effort into the things they are confident about, eager not to waste it on activities with less of a chance of success. As a result, they make their own beliefs come true. The good box office results of the films distributors expected to do well reaffirmed their prior – yet erroneous – beliefs.  This reinforced the myth of the best practice, and stimulated it to spread and persist.

Hence, with all the best intentions, executives often implement what is considered a “best practice” in their industry. What they do not know, is that some of these practices are bad habits, masquerading as efficiency boosters, because their real consequences lay hidden. Yet, questioning and uncovering such practices may significantly boost a firm’s competitive advantage, to the benefit of the firm and, eventually, us all.