Most Companies do not Have a Strategy

Freek Vermeulen is an Associate Professor of Strategy and Entrepreneurship at the London Business School. He is also an active case writer and keynote speaker on industry and company conferences. Freek Vermeulen uses rigorous research to gain insight into how business really works. Last year he published his new book Business Exposed. The Naked Truth About What Really Goes On In The World Of Business. In this book the author reveals the real corporate life and tells about the instant way they live and make decisions. There are a lot of myths about business, Vermeulen says. People believe in deep strategies and smart CEOs but reality gives another truth. It shows that companies often take sudden decisions, CEOs get their profit because of luck and many business mechanisms can’t be controlled at all.

Freek Vermeulen told about his new book and ideas. Aren't you afraid that this book can spoil reputation of solid companies which you consider?Often truth looks not so pleasantly.

Freek Vermeulen: There are companies in the book that messed things up, but for them it was already in the news that they did, so I should not be tarnishing their reputation any further. I am merely explaining what led up to their failure. Furthermore, there are some companies in the book that I had to anonymous, because I know the CEO personally. Finally, there are some very successful companies described in the book, but I describe how luck played a major role in them becoming successful. However, I do not think that harms their reputation, because invariably I explain how they either created their own luck, or made exceptionally good use of it. This, I would argue, enhances rather than tarnishes their reputation. How the information resulted in the book can be useful to readers? How can they use it practically?

F.V.: I reveal and describe – through solid research – how things really work in the world of business. Because all too often the business press, business schools and the companies themselves paint a distorted picture of what really created their success, or what really the role and contribution of a CEO is, and so forth. Therefore, sometimes the book describes how you should do things differently, for instance in terms of organizing your strategy-making process. More often, I just reveal how things really work, but I think it is of critical importance, if you want to run your business better, that you have a correct understanding of how things really work; how decisions get made, how CEOs get selected, how strategies come about, etc. Hence, knowledge and understanding should enable you to make better decisions and organizations. How myths about business are created? To whom are they favorable?

F.V.: Business myths – and I am convinced that every company and industry has some – come about in various ways, but always it concerns some sort of management practice that is erroneously associated with success. For example, Six Sigma became popular because GE widely adopted it; however, GE was already successful before its adoption so their success was not caused by it. Still, everyone said, «if GE does it must be good». Sometimes the practice was created in an era our country where it was beneficial – think Total Quality Management in Japan in the 1980s – but this does not mean it is a good thing in some other circumstances. Management myths are tricky to spot because they seemingly lead to success, although in reality they don’t. This, however, is also a business opportunity; we see that the first company that busts the myth, and does things differently, can become a huge success – think of Southwest Airlines busting some myths in the airline business with their low cost model.

It may sound strange, but they are favorable to the myth itself. You have to realize that myths in business act exactly like viruses. Viruses – like for instance the Aids virus – survive although they decrease the survival chances of their host, because they do not kill instantaneously and spread easily. That’s the same with business myths; before they start really hurting a business, it has already spread to others, and we no longer can make the causal connection that it is the management practice that we adopted years ago that is now causing all this trouble. There is good research on this for instance regarding ISO9000. What has forced you to be engaged in exposure of existing myths about business?

F.V.: It started with a remark by a CEO of a large Dutch company that I was working with at the time. I could not understand why he had organized his company in a particular way, and I failed to grasp his attempted explanation. Eventually he remarked to me «Freek, everybody in our business does it this way, and everybody in our business has always been doing it this way. If this wasn’t the best way of organizing things, I am sure it would have disappeared by now». I knew he was wrong – that everybody does it and has always been doing it, does not necessarily mean it is the best way of doing things – but I couldn’t prove it at the time. Now I can. Whether you agree what people who think stereotypes including about business, easier to operate and form their opinion?

F.V.: I am sorry, I am not sure I understand this question. If you mean whether the reliance on stereotypes might sometimes speed things up in terms of decision making, you are right. Reliance on stereotypes and other mental models indeed aides decision-making; particularly, one does not have to reinvent the wheel every time a similar problem occurs. In that sense, they are a good thing. However, such mental models sometimes also make us miss important things, because we – unconsciously – do not consider them because they do not fit the stereotype. That is why sometimes revolutionary new business models are ignored for a long time by the existing players in an industry; they think it is not relevant because they haven’t seen it before. By the time they get to realize they do have an impact, it is often too late, and the new players have taken control. You have seen this in various industries, such as low cost airlines in the airline industry, minimills in steel, or even steam ships at the time when freight shipping was still being done by sail boat companies; none of which survived this technological revolution, by the way. In the book you speak about the human factor at acceptance of key decisions in the company. For example, much depends on character of the general director, its behavioral strategy, relation to risk. Whether it means, what in the analysis of some steps of the company there is an actual not so much theory of management, how many behavioral psychology?

F.V.: Behavioral psychology plays a huge role in strategic decision making: Cognitive biases, escalation of commitment, diverging interests, imitation, and so forth, have all been shown to significantly influence strategies. But why are we surprised? We know they play a major role in human behavior and decision-making, when you and I are shopping for clothes, bidding at an auction, or determining where to go for holiday. Top managers are no different. Their big decisions are based on the same things. One of my readers wrote to me saying, «you could have called your book «Everybody is stupid» and she was right (not a bad book title by the way!), but with the emphasis on «everybody»; we all have our human limitations and biases, and top managers are no different. From outside it seems that the companies carefully develop and think over the strategy of development. More precisely, heads of the company want, that such visibility was created. What for it is necessary for them?

F.V.: In my view, most companies do not have a strategy. Most companies just do what they do, without a clear understanding why what they are doing is a good set of choices, and how it is going to give them a competitive advantage. The really innovative companies that did have a clear strategy, which revolutionized their business – think of Southwest Airlines, Ikea, CNN – are usually very honest about the fact that they did not think of everything beforehand, and many things had an element of «luck». Recognizing that element, and managing it carefully, increases the odds that you will do well, and should very much be part of a business strategy. As the book affirms that the majority of successful general directors, by definition, aren't competent. How they manage to deduce the company in leaders and for years to be kept on the positions?

F.V.: That’s not exactly how I put it. I write that the top 1 percent of best performing companies and managers are «by definition incompetent». I realize that this is an extreme point of view (just to make my point clear) but there is some truth to it. The absolute top performing companies did something very risky and then just got lucky. But for every company that got lucky with that strategy, there are 99 that just completely failed and went under. But the point is that we never hear from them; they do not make the news; only the lucky 1 percent does. Really good managers and companies, who manage risk carefully and deliberately and make well-balanced choices, will do well but won’t have such a spectacular return. But we can actually learn more from them. Hence, my point is that should not be blinded by the spectacularly successful. What effect gives presence of government officials at boards of directors of the large companies?

F.V.: It is difficult to do research on that, but we do know a bit, mainly from research done in the US, and this research suggest that companies use boards of directors to buy government influence. It is not really that the government officials promote the company while they are in government, but they receive their board memberships – which are very popular and lucrative jobs – after they have done well for the company, as some sort of a reward for their past services. It is of course not that all directors are appointed for that reason, not even all directors with a background in government, but the research shows that it does play a role. And of course that all sounds a bit dubious… In Russia heads mistrustfully concern independent advisers for management. Сould you dispel skepticism of such people?

F.V.: It of course depends on who those people are. In general, having an outside perspective on your company and strategy can definitely be a good thing, as we know from research. Outsiders are often not so bound to myths, habits, escalation of commitment and alike; the type of psychological things we talked about earlier. On the bad side, we also know that they often create and spread management myths – undoubtedly unintentionally, but they do. As said earlier, these management myths act much like business viruses, and the independent advisors are then often the third party that promotes their spread; much like rats help spread viruses… I realize that does not sound too positive! But of course there are potentially good and potentially bad things about independent advisors; not using them at all because of the possible negatives makes you miss out on the positives, but you should definitely be careful, and not just believe everything they say and do. You assert that often the companies don't finish speaking and hide from clients and the public the important information. What information companies don't want to publish more often?

F.V.: Companies and CEOs – like the rest of us – are often inclined to exaggerate their successes and downplay or outright hide their failures; I guess that is only human. When a certain acquisition, or R&D project, or major new product launch did not turn out so well, CEOs are also inclined to hide it a bit, because their reputation is on the line and it is simply a bit embarrassing. The trick is that we know from research that giving top managers lots of performance-related pay, such as stock options, increases this inclination significantly; now there is not only a reputation on the line but also hard cash! These are unexpected and certainly unintended consequences of the way we remunerate top managers; I explain a lot about these (often rather nasty) unintended side effects of things that we do within corporations. As the book affirms, units of the innovative companies are successful only. What is pledge of a successful innovation?

F.V.: I am not sure I entirely understand this question either, but if you mean what the “secret” is of successful innovation, then I would say “luck”, and managing luck. The most successful innovations – whether a product (e.g. 3M’s post-it note) or a whole business model (e.g. low cost airlines) – often came about with a healthy dose of luck. The point is that often these companies and entrepreneurs managed their luck quite deliberately. They usually experimented and kept experimenting until they hit on something that worked; often something else then they originally intended. This means that you often cannot entirely plan a successful strategy, but you can help make it happen. Whether it is possible to compare successful top-managers to sports stars, cinema, and television? Whether their ultrahigh expenses are justified economically?

F.V.: In some ways they are comparable; they often also become celebrities and either become real heroes – featuring in all sorts of magazines, books and television programs – or villains, when their companies fail. Indeed, they also get paid a lot. I used to think that that is simply the market; if you want the best CEO, you have to pay for it. However, now that I have studied all the research on the topic – and there is quite a bit of good research on it – I have come to understand that top management pay is influenced by lots of other factors (e.g. issues of politics and power) and that their ultra-high salaries are often not justified by performance at all. Simply put: they often get paid too much. Whether the second wave of crisis threatens the world? Probably, you will open to us truth about the one who stands up for world economic shocks?

F.V.: The 2008 crisis was caused by a bunch of poorly managed companies, i.e. banks. The pending 2011 crisis, however, is caused by a bunch of poorly managed countries. The latter is an even bigger problem. But both of them are again caused by the fact that the corporate world – especially banking – has become so much more globalized; significantly more than even 10 years ago. This means that problems can snowball across country borders and escalate, which is what we see happening.

The originally causes of the problems – in the poorly managed banks and countries – are surprisingly similar. What led to major business disasters such Union Carbide in Bhopal, Enron, or BP’s recent Gulf disaster, are highly similar to what happened in Lehman or in Greece. These really are crises of management, above everything else. I am assured that you managed to learn many the impressing facts about true activity of some the companies. What of them has impressed you most of all?

F.V.: What has surprised and impressed me most is that through thorough, and often quantitative research you can really show evidence that things do not work in the way people in the business itself think they do. People often collectively believe X works, but if you really measure and analyze it appears that Y leads to success, and that X actually does more harm than good. I have seen this in various, very different businesses ranging from film distributors, to newspapers, the Champagne industry, IVF clinics, etcetera. In all of them people held firm beliefs about what worked in their business and not, and all of them were wrong. This also tells me there is still ample opportunity to really be innovative in all these businesses, and create a lot of wealth and prosperity.


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