[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?
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.
