Monday, June 4, 2018

Ten Deadly Sins of CEOs and Business Owners¹

[Editor's Note: Being the CEO or business owner can be a lonely job. It is important to get good feedback so that you can keep a balanced perspective. Below are just ten of the deadly sins that can be committed by the guy or gal at the top. I have been at the top or owner of eight companies - and I know it's not always easy to see yourself clearly. This is a reprint of a previous Issue for Growth. I think it still holds true. As always, we welcome your comments.  - DPM]
                                                                                                                                 
Talking Too Much. You never learn by talking, but some CEOs imagine the world to be in desperate need of their constant wisdom. It is a rare subordinate who will risk stifling a CEO. Be inquisitive, ask questions, and listen at least 75% of the time.
Goals Are Too Aggressive. It is wonderful to have a BHAG (Big Hairy Audacious Goal) or vision. It's another to develop overly aggressive goals on a routine basis. Unrealistic goals "demotivate," especially when compensation is involved. One CEO expected his company to continue its 30 percent annual growth rate, not appreciating that with a larger base and a rapidly maturing market their era of high growth in that market had to end. The result discouraged managers.
Personal Power Building is More Important than Value Building. Some CEOs tend to make decisions that enhance their scope and influence, even at the expense of increasing shareholder value. This can be paradoxically true even when the CEO is a large shareholder or the business owner. Dr Robert Kuhn puts it this way: "I want a CEO whose greed exceeds his ego. Good CEOs and business owners should be motivated more by amassing wealth for their shareholders rather than by building empires for themselves."
Not Respecting or Recognizing the Ideas of OthersCEOs and business owners can be egotistical. Highly successful almost by definition, many CEOs would seem to have every right to be self-impressed. However, when you hold the top spot, puffing yourself up at the expense of subordinates impedes the organization. You benefit when your people are encouraged and empowered to generate novel ideas. Recognition of these good ideas breeds more ideas.
Not Focusing on Accountability and Execution. Some CEOs and business owners love new ideas, programs, and initiatives. They introduce change for the sake of change. One company we looked at recently had seventeen (17) major strategies for an upcoming year. Focusing on a executing well on a few carefully selected strategies, developing clear objectives, and holding managers accountable, can be the difference to success.
Managing by SummariesA CEO should perceive the world as it truly is; if cluttered and chaotic, so be it. When information is always "high level," predigested by staffers, a CEO may perceive an artificial world, a virtual reality as it were, of cleanly manicured lawns. Most CEOs have great instincts about their businesses, and such instincts should be nourished by raw data, like, for example, call reports of customers.
Don't Fall in Love. When you sit in the corner office, follow your head not your heart. Every business must have a strategic or financial purpose, and if a business happens to make you feel good that's fine as long as your emotional attachment doesn't interfere with your rational decision-making. CEOs are notoriously vulnerable when making acquisitions.
Feeling Invincible.  CEOs must have superb track records-some are almost unblemished -so they have a proclivity to imagine themselves as invulnerable. The natural corollary is a robust confidence, even if subconscious, that past success assures future success. I can't tell you how many dozens of CEOs I've seen who refused to sell their companies at what would turn out to be, in hindsight, their peak market values, simply because they were convinced that tomorrow's prospects would mimic yesterday's triumphs. Looking backward and looking forward, a humble, healthy respect for the subtleties of serendipity is the beginning of wisdom.
Halo Hiring. In some organizations, many of the senior executives look like the CEO. I mean this quite literally and it can be very funny. Not just obvious characteristics like gender and race, but also personal traits like size and stature, political philosophy, sporting interests, demeanor, even style of dress. In a globalized world where customers and suppliers may be very different kinds of people, it is not wise for the executives of a company to be homogeneous, and hence, uniform in their thinking.
Beware of Averages.  Averages can deceive. For example, assume that, in a pharmaceutical company, prices are declining for one-half of the drugs and increasing for the other half; the fact that the average price of all drugs has remained steady is worse than meaningless information. Strategies for drugs that kept prices steady might not work at all with those whose prices were decreasing or increasing. The same is true for net profitability on an individual customer basis. Averages hide meaningful information. The information extremes or "skew" is your friend.

Could you benefit from having a strategic business coach?  Contact me to discuss why having one of our coaches who is an experienced CEO / business owner could help you be a better leader and could make a world of difference in your company's results.  

Monday, May 7, 2018

Attributes of a Lifestyle Business or an Equity Value Business?




[Editor's Note: In the last Issues for Growth, "Which do you have - a Lifestyle Business or an Equity Value Business" we outlined the major differences between a lifestyle business and an equity value business and why it was important to be clear about the "purpose" or intent of your business because the way a business owners  approaches building a business must be very different depending on how you will define success. A number of you who have heard me speak about this issue asked me to publish the matrix of attributes comparing a lifestyle vs equity value business. So, here it is below. I hope you find it helpful.           - DPM]
 


Lifestyle Vs Equity Value Attributes Matrix 
Attribute
Lifestyle
Equity Value
Focus
Short-term Lifestyle; Run for Owner's compensation
Long-term Equity Value; sacrifice short -term comp
Pace
Owner's pace
Dictated by desired outcome
Management style
Command & Control; Centralized
Decentralized; individual decision-making
Owner Management
Can tend to be viewed as inconsistent, capricious and changing
Consistent with overall strategy and core values
Expense Control/ Spending decisions
Tightly controlled at top
Managed through approved dept budgets and policies
Outside Capital
Debt; Investors not interested; Growth may be restricted due to availability of capital
Equity investors
Empowerment
Limited; Loyalty Rewarded; Small circle of trust
Expansive; Performance rewarded; Systems to enhance empowerment
Objectives
May change at owner whim
Clearly outlined; transparent
Employee Equity
No
Yes; equity awarded
Career Development
Limited upside
Significant upside
Employee Capability
"Steady Eddies" Thrive here
High performers thrive here
Sale of Business
Usually only to Employees or Family
To third-party Buyers (Strategic or Financial)

Monday, April 16, 2018

Which Do You Have - a Lifestyle Business or an Equity Value Business? It's Important to Know the Difference


Speaking to a group of business owners about defining their business vision, I suggested that they be clear about whether they want an "equity value business" or a "lifestyle business", because the way they approach building a business must be very different depending on how they will define success.

The Lifestyle Business.
The term "lifestyle entrepreneur" was coined in 1987 by William Wetzel, a director emeritus of the Center for Venture Research at the University of New Hampshire. Mr. Wetzel was using it then to describe ventures unlikely to generate economic returns robust enough to interest outside investors. In financial jargon, "there's no upside potential for creating wealth," he explains.

 "Lifestyle ventures are usually ventures that are run by people who like being their own bosses," Wetzel says. "But they're in it for the income as well. Indeed, lifestyle entrepreneurs offer a different...view of success than those who are mainly focused on longer-term wealth accumulation.
Lifestyle businesses are businesses that are set up and run by their founders primarily with the aim of sustaining a particular level of income and little more; or to provide a foundation from which to enjoy a particular lifestyle. Some types of enterprises are more accessible than others to the would-be lifestyle business person. Those requiring extensive capital are difficult to launch and sustain on a lifestyle basis; others such as small "creative" businesses are more practical for sole practitioners or small groups such as husband-and-wife teams.
Lifestyle businesses typically have limited scalability and potential for growth. In conventional business terms, lifestyle businesses typically have limited scalability and potential for growth because such growth would impair the lifestyle for which their owner-managers set them up. However, a lifestyle business can and do win awards and provide satisfaction to its owners and customers. These are firms that depend heavily on founder skills, personality, energy, and contacts. Often their founders create them to exercise personal talent or skills, achieve a flexible schedule, work with other family members, remain in a desired geographic area, or simply to express themselves. But without the founder's deep personal involvement, such businesses are likely to, well, founder. Professional investors therefore rarely get involved with lifestyle businesses. A lifestyle business is also one that can allow the owner to call his/her own shots and to move at his/her own pace. It's a business that fits his/her current way of living rather than dictating how things ought to be done. For millions of people, these sorts of small ventures are an excellent way to "do what you love."

The Equity or Value Business.
Equity can be defined as: A company's assets, less its liabilities, which are the property of the owner or shareholders.  Popularly, equities are stocks and shares which do not pay interest at fixed rates but pay dividends based on the company's performance. The value of equities tends to rise over the long term, but in the short term they are a risk investment because prices can fall as well as rise.

An equity or value business is one where the owner intends to build real assets with a grow-able, tangible value that can be bought and sold - either as shares or the entire business. Success would be defined as the increase in value of the business over time. These businesses by definition will be built to succeed without the presence of the owner(s). In many cases, current lifestyle of the founder/owner is sacrificed in order to build significant long term value. In equity value businesses, owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, strong management team that can operate and grow the business without the owner's constant involvement,
By contrast, a lifestyle business is one where the entrepreneur seeks to generate an "adequate" income while living where s/he wants, doing what s/he loves, or having the flexibility to be around when the kids or grandkids come home from school or take long weekends in the winter to go skiing. Success would be defined as an increase in satisfaction with one's life over time.

It's imperative to decide which one you are.
These are very different scenarios. "Equity value or lifestyle" is one of those fundamental decisions you should make early in your company's history. If you're contemplating going into business with a partner, determine if you both would answer the same way. So why is it important to decide? Businesses that do not have a clear understanding of the type of business they want - and are prepared to be suffer inferior returns. Going down a path that straddles both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value).

Consider one company with an innovative product in the education products space. The founder had a stated goal of building a value business. However, actions demonstrated to key employees and managers that the true motives of the founder were to facilitate the founder's lifestyle. A confused culture prevailed. Top employees and managers interested in growth left the company, leaving a cadre of lower performers, interested in maintaining the status quo. The company growth and profitability lagged and the company ceded its leadership position to more aggressive competitors. In the end this company accomplished neither growth in value nor an exceptional lifestyle for the owners.
Be honest with yourself. Be honest with yourself about your appetite for risk, your need for autonomy, your desire for current compensation. In the end, neither is good or bad. It's just, which one is for you and your business?

Next Issue: The Attributes of the Lifestyle business vs. the Equity Value business.
What are your thoughts? Share your reactions.

Monday, March 26, 2018

It's Not What Keeps You Up at Night.... But What Gets You Up in the Morning?

[Editor's Note: When my alarm goes off at 4:00am, I am usually up already, getting coffee, and bounding into the opportunities of the day. That's me... and while many people may think I am a little strange to be up at 4:00am, I can't wait to get started on each day. I came across this blog post from Sally Helgesen recently and it made me think that in this age of talent shortage, we need to be spending more time on what engages and motivates people - the positives. I hope you find this useful. -dpm]
It's Not What Keeps You Up at Night.... But What Gets You Up in the Morning?
What keeps you up at night? It's a question we've heard posed in nearly every panel and senior leader interview conducted in recent years, and as a result, it has become tiresome and rote. But I believe the effect of this query is more pernicious than simply boring - stay awake long enough to think it through, and you'll recognize its essentially negative nature. The question assumes that leaders are in the habit - indeed, that they have a responsibility - to let worry pervade their every hour, even those precious few required to refresh, balance, and sustain human effort.


That's why it was bracing to hear the chief economist of a global bank describe how his CEO responded to this question at a recent meeting of senior employees. "I'm sick of that question," the CEO had said. "Besides, it misses the point. More important is: What makes me leap out of bed in the morning?"
The CEO then told his listeners that "the terror of missing an opportunity" impelled him to get up every day. Within 24 hours, the bank's shiny new headquarters became known throughout the company as "the tower of terror." That's hardly the most positive vision. But if we focus on the invocation of opportunity rather than terror, we'll recognize that the CEO made an important point: It is vastly more productive to spring out of bed eager to spot new opportunities than it is to greet the day in a defensive crouch brought on by post-midnight agony fests. And it is a far more powerful way to lead an organization.
In other words: In an economy in which the harnessing of human knowledge offers the chief - and perhaps only - competitive advantage, the need to engage human talent has become paramount. And just as leaders on the lookout for opportunity can build and stimulate engagement, they also can undermine engagement by exuding negative energy.

If you understand what motivates people to get out of bed, you understand what engages them.Beverly Kaye, founder of Career Systems International, an engagement and development consultancy, is coauthor of the engagement classic Love 'Em or Lose 'Em: Getting Good People to Stay, now in its fifth edition (Berrett-Koehler, 2014). She has been examining the sources and advocating for the importance of employee engagement longer than anyone I know. "One of the first questions we asked people when doing our original research on engagement in the 1990s was what about their work motivated them to get out of bed in the morning," she told me. "If you understand that, you can understand what engages people."
People want a few basic things in their work, Kaye pointed out: "They want to feel valued, they want to be able to use their skill sets, and they want to be challenged by new ways to exercise and build those skills." If jobs don't give people the opportunity to fulfill these basic needs, many employees will leave - and the best are often the first to go. "And those who stay will often check out mentally and simply disengage, which from an organizational point is probably worse," she said. If jobs don't give people the opportunity to fulfill these basic needs, many employees will leave - and the best are often the first to go.
 
Leaders who are optimistic inspire confidence throughout the organization. Over the years, Kaye and her researchers have also asked thousands of people why they left their organizations. "What we hear usually comes down to some variation on their not being able to see any opportunities in their job," she said, which is why a focus on opportunities is critical in a leader. "People's experience at work is determined by their manager, and the experience of managers is determined by those who manage them, going all the way up to senior leaders....Leaders who are optimistic about what their people can accomplish, and see challenge through the lens of opportunity, inspire confidence throughout the organization." Optimism cascades down.
By contrast, leaders who worry excessively - the up-all-night types - can set a cautious or even frightened tone that spreads discouragement. In Kaye's experience, "worried leaders tend to fail their people in one of two ways. They may be distracted and overlook signals people send about what they are capable of. Or they micromanage, either because they don't trust their people or as a way of managing their own anxiety." Both approaches inhibit morale and make it impossible to build a culture of engagement.

The CEO needs to prepare the company for the future, which is all about seeing the opportunities in the larger picture.
It's interesting to note that the CEO who pushed back on the original question - "What keeps you up?" - had been chief risk assessment officer at another large financial institution. A former member of his executive team who heard about the pushback observed that the answer showed how much the CEO had grown as a leader. Worrying about what could happen, Kaye observed, is practically a job description for risk managers. "If you don't have a few sleepless nights, you may not be doing your job," she said. "But a CEO has a different brief. He or she needs to prepare the company for the future, which is all about seeing the opportunities in the larger picture."
Jim Kouzes and Barry Posner, my gurus in all things leadership, note in their classic work, The Leadership Challenge: How to Make Extraordinary Things Happen in Organizations (Wiley, 1987), that successful leaders always "challenge the process." That is, they look for opportunities to go beyond the status quo and innovative ways to improve the organization. Kouzes and Posner are clear that doing so always requires some degree of experiment and risk, as well as a willingness to accept the consequences when a risk does not pan out.
In a highly uncertain environment, that's a pretty good prescription for what most of us can do. And recognizing it might bring us to a renewed recognition that wakeful worry does not a good leader make.
   
What are your thoughts? Share your reactions.

Sunday, March 4, 2018

How to Banish Bad Habits from Your company

 
[Editor's Note: This is an unusually long article for Issues for Growth. However, I was struck by the importance of the subject matter and thought that as business owners and CEOs, we could all benefit from this. If you would like to read the original article, see Strategy + Business. I hope you find this useful.                            -dpm]

How to Banish Bad Habits from Your company

The idea that companies may unwittingly use inefficient processes and pursue poorly focused strategies is not new. Corporate history is littered with examples of businesses being too slow to spot redundancy and incumbents being put out of business by nimbler new entrants.

But what if this phenomenon could be explained by a simple concept? Perhaps companies have allowed bad habits to creep in, and just don't know it. Furthermore, what if bad habits are so ingrained that executives have lost sight of what defines best practices? Or are blind to the possibility of being disrupted?

The following is an interview with Freek Vermuelen, author of the book Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business(Harvard Business Review Press, 2017).

Vermeulen found that executives are likely have blind spots that prevent them from noticing and weeding out bad habits - such as a strategy that might have worked for years, but that no longer does. In other words, they are doing something because "that's how we have always done it." Like viruses - at least currently - bad habits can't be eradicated, Vermeulen admits. But a focus on diagnosing them is a good start, and can even create sources of innovation.

Vermeulen spent an hour with strategy+business in his offices at the London Business School, overlooking the city's Regent's Park, in November 2017. Much of the conversation revolved around how his many years observing corporate bad habits had been synthesized in his book.

S+B: At first glance, the idea that there are bad habits in companies doesn't seem that surprising, because many companies have corporate cultures that go back a long time. They may be set in their ways. What's the difference between that and the bad habits you describe? 
VERMEULEN: Of course you're right - it will surprise no one that, over time, especially larger organizations can be a bit rigid and old, and bad practices slip in. But basic economic theory would simply say, "That's too bad for these firms, but they will be outcompeted. There will be other ones. And gradually, they will not grow, they will shrink, they will go bankrupt, and so on." That's actually the whole basis of capitalism; we say bad firms with bad strategies and practices will die out, and therefore, things will get better.
The idea that obsolete strategies will automatically die out is not necessarily true. But I hear executives quite often use it as an excuse: an explanation where they say, "Gosh, this practice or process has been around for decades in our industry." I have a CEO in mind now who said to me, "Freek, if this wasn't the best way of doing things, I'm sure it would have disappeared by now."
So, although we may know in an abstract way that old practices sometimes need to be changed, for particular individual practices, we still think that because everybody's been doing it for a long time, it must be the best way of doing things. "We've already been doing it this way for two decades. We know it works. And if it didn't, it would have disappeared by now." I've tried to explain properly and thoroughly why that assumption is wrong.

S+B: Why is it that organizations are afflicted by this, even as we are surrounded by management discussion about the need for change and reinvention? 
VERMEULEN: People forget. Someone in the firm invents the wheel. "This is the way to solve it," they say, and then the organization passes this on to the next generation in the organization. That's one reason organizations exist, you know? So you don't have to reinvent the wheel all the time. But we think this process works, and we just pass it on, not being aware of when circumstances change, especially when they change gradually. When there's a big shock in the environment and a new competitor or technology comes in, we notice. But when things gradually change, we don't notice and we just continue doing it this way.
And indeed, lots of companies talk about agility and flexibility and change. I have some doubt about the importance of those attributes. There are still many relatively stable and homogeneous industries around. But also, understanding the need for change on an abstract level is different from understanding a specific case: saying, "Hey, this process, why are we doing it this way?" There's a gap between having an abstract understanding of the need for change and actually identifying what should change and making it work in your own organization.

S+B:
How do bad habits creep in and stay there, then?    
VERMEULEN: One way is when something starts out as a good practice, but as circumstances change, it no longer is so good, which means it's very difficult to catch. Various examples, also from my own research, show that bad practices can come into existence as bad practices and, still, they can spread and survive. I puzzled about that for quite a long time, because it's such a fundamental issue in strategic management and in economics: Why do bad practices spread? And I found the answer in cultural anthropology. Even bad practices have advantages and disadvantages. And sometimes the advantages are much more obvious than the disadvantages - for example, because the advantages happen in the short term whereas the disadvantages happen in the long term. And if these disadvantages then outweigh the short-term advantages, we still don't see that, because there's lots going on, there's a long time lag, and so on. My research on the in vitro fertilization [IVF] industry is a good example of that.

How Good Habits Go Bad

S+B: You refer to this as "causal ambiguity."
VERMEULEN:
 Yes. I did a big quantitative research project on the IVF industry for fertility clinics in the U.K. The majority of these clinics are private. IVF is a big business. But at the inception of this industry, when permission to perform the procedure was granted simply by the government, the government said every clinic had to publish its success rate. And the government did that with good intentions. They wanted to increase transparency in the market and aid consumer choice and so on.
But what the government hadn't realized - and I think this clearly generalizes to other industries - is that the success rate of a clinic depends not only on how good it is as a company, and how good it is at the procedure. It also depends on the input. Some patients are easier to treat than others.
The very first person I interviewed in this industry immediately started talking about this. It's a big topic in the industry. Clinics started selecting their patients, because their leaders thought if they treated only easy patients, their success rate would be higher. The clinic would be ranked higher in what the government called the league table. It would look better. And that has all sorts of immediate benefits.
But what I found out through this research project is when we measured the effects of this practice, it showed that in the long term, clinics that select only easy patients to treat are worse off. Clinics that treat difficult patients become better off, because these difficult patients become a source of innovation.

S+B: So one way to break bad habits is to stop doing the obvious, and this itself will be a source of innovation?   
VERMEULEN: Exactly. This study showed that more and more clinics started to adopt a practice that, in the long term, was bad. And because it was only in the long term that they were experiencing trouble, they still didn't realize that it was the practice of seeking only easy patients - the bad habit - causing the lack of innovation. If you had a bad habit and you stopped this practice and said, in this case, "We're also going to admit and treat difficult patients," you would trigger innovation.
I encountered other examples. For instance, a company making wound-care products told me that company leaders started debating making products for very complex wounds that very few patients in the world suffered from. And they said, commercially it wouldn't make any sense to manufacture these products because there are so few patients, and a lot of work goes into these products. But when I talked to the engineers, they said that they learned a lot from these cases, and you could trace a lot of innovation in the company's regular products back to those complex cases. So I would say: Pursue the complex variants of your core service or core product, and that pursuit can be a source of innovation - while ridding you of bad habits.

S+B:
You've said also that companies unknowingly adopt bad practices when they try to benchmark their organizations. In other words, they can unknowingly make matters worse. How is that?   
 VERMEULEN: Benchmarking is by definition where companies look at the best-performing companies in their industry. What companies don't look at is the bottom-performing ones. Companies therefore are inclined to imitate the practice and strategies of the top 10 performing companies - whichever they pick in the benchmarking exercise. But of course different strategies and practices are often associated with different risks. Some strategies may, on average, result in worse outcomes, but because they are high risk a very small minority of these companies will actually have good performance due to sheer luck. Therefore, these companies that are benchmarking take too much into account companies that simply got lucky.

S+B: Are bad habits essentially a product of herd mentality or groupthink? I think of an example in which a company feels under pressure to enter an emerging market such as China because its rivals have done so or might do so.
VERMEULEN:
 Yes, there's certainly a close relationship between bad habits and herd mentality. In economics, we call this herding theory. Because in a way, there is safety in numbers, and herding, including the imitation of bad habits and bad practices, happens only in situations of uncertainty. "This strategy to enter China, we don't quite know how it will play out," company leaders will think. And it's a very human behavior, but we also know it from research on organizations. We look around us, and sometimes we follow the benchmarking exercise and we look at what others do, and if the majority of companies go into the Chinese market, then we say, "We'll have to go there as well."
In this way, bad habits and bad strategies can also spread. Now, it's  true that if you want to resist that norm, you have to be brave because of the herd mentality. If you do go into the Chinese market but it turns out to be a dud - which it did, by the way, for quite a few industries - people won't blame you so much because they will say, "Well, everybody got it wrong."
But if you're the only one who stays out and everybody goes into the Chinese market and you think, "I'm not going there because I think there's an 80 percent chance that it will fail," and then it happens to be the 20 percent and it turns out to be OK, everybody will say, "You idiot. Everybody else saw it and you didn't." And you get blamed.

Even Startups Succumb

S+B: Is the habit of bad habits worse in large, older companies than in small, newer companies?
VERMEULEN:
 We see from research, including my own, that new entrants are often under pressure to conform to other parts of the industry. So, although they might not have these rigid processes and systems and other legacies in place, there is also external pressure on them to conform.
For instance, consider the investors or, indeed, customers or employees who say, "Gosh, everybody's going into China. Shouldn't we do this as well?" or "Everybody has a partnership structure in consulting. If we come in as a consulting firm, shouldn't we also have a partnership structure?" That is, there is external pressure to conform, and that external pressure can have real consequences. If you resist the norms, you find it difficult to recruit. You find it difficult to access money from investors. We do know that, for instance, suppliers might react by saying, "If you want us to work with you, you have to adapt more to how we do things in the industry."

S+B: To what extent do suppliers and customers reinforce bad habits?  VERMEULEN: To a great extent. Let me give you an example of academic research that I'm conducting right now. This is research with a former Ph.D. student, Amandine Ody, who is now a professor at Yale. We're studying the market for champagne grapes. In this industry, the suppliers grow the grapes and sell them to champagne houses, which turn them into champagne. We're looking at champagne houses that are trying to do something different in their supply chain - for example, by making sparkling wine in California or producing wine for supermarket brands. These are considered clear "norm violations" in the French champagne business and something a good house is not supposed to do. We then measure whether these houses are suffering penalties for such actions - such as their suppliers saying, "If you also produce wine in California, we'll charge you higher prices for grapes," which would create a short-term disadvantage. And even if such a champagne house might still be better off in the long term doing it, they often don't dare do it because of the uncertainty. So, companies that try to go against the norm often get pushed back into the norm by the ecosystem they are in. We also see that happening with new entrants.

S+B: What may seem a bad habit in the West may not be in other parts of the world - and vice versa. Is that fair? 
VERMEULEN: Sometimes regions can also be a source of bad habits in the sense that what can work in one geography, if transferred somewhere else, doesn't necessarily work. There is good research available on the old total quality management approach, which came from Japan and then was applied in the United States. People started doing it because they thought, "This is a good practice, it worked wonders in Japan," but it got transformed in a different cultural context.
Clearly it can work the other way around as well. Going back to the idea of breaking norms, an entrant from a different geography can come in and do things differently in a way that's successful. And that can trigger change in an industry.
One example is the practice of detailing in pharmaceuticals marketing. In many countries, there are restrictions on drug advertising, so salespeople adopt the practice of handing out to healthcare professionals samples and information on certain drugs that's not technically advertising. It's a huge practice. There is research on the effectiveness of it by two Columbia professors. On average, these salespeople have to give out 26 free samples to induce just one new prescription. It's very obviously not cost-effective anymore. And I say "anymore" because it might have started out as a good practice; it just has been pushed up to such levels that it's now wholly ineffective.
The pharmaceutical companies I spoke to all said, "Yeah, everybody's having doubts about whether it's still effective," but they stick with it because of, again, uncertainty. "We don't know what will happen if we stop it or if we scale back."
Then I spoke with a Japanese company that had entered the Western European market and said it was not going to use detailing. The company was quite successful. This is a case of an entrant from a different geography doing something different, triggering change. So inasmuch as bad habits can come from different sources, solutions can too.

Escaping the Pattern Trap

S+B: What is your solution for breaking bad habits? 
VERMEULEN: If you're a large company and you have suspicions that surely there must be bad practices in your industry and bad habits in your firm, you may not know which ones they are and how you get rid of them. I do a lot of work on that, and I have quite a lot of normative implications that I've thought through, and research on what sorts of things you can start doing.
One solution is something we've talked about already: deliberately trying to make your life difficult by doing difficult variants of your product, as in the wound-care example. But I also have a large project I've labeled Change for Change's Sake, which I wrote about in a Harvard Business Review article a few years ago. There are various things that you can structurally build into your organization. If you are a CEO and want to start identifying particular examples, there are certain things that you can think of.
One - which I use myself when I'm getting to know a company - is asking company leaders: "Why do you do it this way?" As we mentioned earlier, people will say, "That's just the way we do it, and that's how we've always done it." Every time I get this answer, I think, "If you cannot explain to me for your own company why this is the best way to run things, we might just have identified a bad habit."

S+B: Not being able to spot bad habits may have been problematic in the past, but it is all the more problematic given such disruptive forces as robotics, artificial intelligence, and automation.
VERMEULEN:
 Yes. But there's a distinction I would like to draw. People talk about disruption all the time and what could such and such a company do or what could others do. They always think about it in terms of what could someone develop that's new in technology that would disrupt us. The automotive guys talking about Tesla is a case in point.
What I'd say is different in my work is that the starting point is not "What else could we do in this context?" but "What could we stop doing?" In other words, what things is a company still doing that actually don't make much sense anymore, because things have changed? That's a good starting question as well.

Now, I have looked closely at companies that have asked this question. One is citizenM Hotels, originally a Dutch company, not entirely coincidentally. But it really took this idea explicitly as a starting point, and if you go to a citizenM you can see it.
The company decided that the hotel industry is very homogeneous. There are things that hotels have been doing for years, such as having a concierge. But today, a lot of people use TripAdvisor or other apps, rather than a concierge, to find a good restaurant near the hotel. You might observe that many hotels have a restaurant. Here in central London, who wants to sit in a hotel restaurant? We still have a check-in desk where you have to queue for 20 minutes before they give you your key. Yet we probably printed our own boarding pass at a kiosk in the airport. So citizenM asked the question, "What if we stopped doing these traditional things?"

Company leaders not only took the kiosk idea from airports but they also went to look at the rooms in cruise ships to design a small bedroom that could still be luxurious. So they really looked for analogies, solutions from other businesses, in search of good practices.

I have another example, this one from financial services: Capitec, a young bank in South Africa. When you come into a traditional bank and you want to open an account, they first want to ask your salary and take you down a path of various banking products, depending on your answer. The Capitec CEO said to me, however, "Look, when I go to Nando's [restaurant], they don't ask me for my salary and, when they know my salary, get me a different menu with different prices and food. I get the same menu, same food as everyone else. Why is that different from a bank? That's what we stopped. Everybody gets the same account. Everybody gets a gold card. That's it."
The vast majority of people in South Africa want to do just three things at their bank: savings, transactions, and maybe borrowing. Capitec has one basic account from which a customer does these three things. And by doing it this way Capitec has managed to offer 50 percent better rates. It was profitable in Year Two, which in banking is nothing short of a miracle, because switching between banks is extremely rare. More people get divorced in the U.K., for instance, than switch banks. And Capitec has 9 million customers after 16 years.

Another example of Capitec's original thinking is its banking hours. In South Africa, retail banks close at 3:30 in the afternoon. And the Capitec CEO said to me, "I didn't understand why. And then I figured it out. It was probably left over from the days that money was physical and at the end of the day banks needed an hour or two to count the money and balance the books and so on. Now, 99 percent of the money is electronic and that happens in a split second - but banks still close at 3:30." One of the first things the bank did was set its hours to be open until 6:00 in the evenings. It is also open on Sundays. "We are a retailer" was how the CEO summed it up.

S+B: But isn't there a blurred line between breaking bad habits and simply innovating?
VERMEULEN:
 Yes. Each is one side of the same coin, perhaps. Stopping doing certain things is a different route to innovation. I said to the Capitec CEO, "You're a disruptive innovator." And he replied, "I'm not a disruptive innovator. We aren't actually doing anything new. We haven't invented other things to add to this. All we have done is stop doing certain things." As I said, this type of relatively simple thing, stopping a bad habit, really made them very successful.

S+B: Is it realistic for companies to break bad habits in any significant way in the next five or 10 years? 
VERMEULEN: Perpetuating bad habits has been around forever and likely will always be around. It's part of nature. It's the same model as you see in epidemiology and viruses. Bad habits operate like corporate viruses. A virus persists and spreads. Bad habits also spread and persist. They persist despite having a negative influence on the host and even reducing life expectancy.
This explains why capitalism, economic theory, is too naive. Will we eliminate corporate viruses? No, we'll never eliminate all biological viruses or all organizational viruses. But what we can do with viruses in nature is identify the virus and say, "We're going to try to tackle this."
Bad habits won't disappear automatically through competition, just like nature doesn't weed out viruses automatically, but companies can inoculate themselves by building in certain processes. They can identify the source of their troubles, and say, "This is the virus that we're going to try to get rid of."
  
Author: Jeremy Grant is international editor of strategy+business.

   
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