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CHAPTER 1
We're Suckers for Success
At the end of World War II, in 1945, the Japanese economy was devastated. Industrial areas were destroyed in almost all major cities, transportation networks were severely damaged, a quarter of Japan's national wealth was annihilated, and more than 2 million people in its workforce were killed. The country's population suffered for a decade.
Yet, by the 1960s, Japan's economy started growing rapidly and unabatedly. In what became known as Japan's "economic miracle," it quickly rose to become the second-largest economy in the world. Where, in 1965, Japan's gross domestic product stood at about $90 billion, by 1980, it had increased to over $1 trillion. Much of this was achieved through exports. Japanese car manufacturers, for example, were outcompeting the traditional Western brands in their home markets. Japanese cars — such as Toyota, Honda, and Mitsubishi — were more affordable but also of significantly higher quality. American car manufacturers, among others, were eager to learn how the Japanese companies managed to achieve this.
A large part of their success could be ascribed to a set of new management practices referred to as total quality management (TQM).
In the 1950s, Americans W. Edwards Deming and Joseph Juran had gone to Japan to lecture on quality management, and their views concurred with those of local management professor Kaoru Ishikawa. TQM — as the practices they advocated became widely known — prescribed how all aspects of an organization should be committed to delivering quality: not only top to bottom within the organization, but also start to finish in the entire product life cycle (see sidebar for a more comprehensive take on TQM).
Overall, TQM required a long-term, cooperative, and comprehensive approach to doing business. In order to be successful, organizations needed to continuously improve their processes and deliver high-quality products and services that were useful to customers. By doing so, they would grow and gain market share while uniting employees around a common goal and providing them with job satisfaction and security. From all this, profits would follow.
And, indeed, Japan's multinationals kept growing and flourishing with TQM.
So it's no surprise that American companies, many of which were watching their market share dwindle, were eager to replicate Japanese companies that adopted TQM and, with it, their successes. Consulting companies also jumped onto the bandwagon and began offering TQM workshops and implementation programs. If it worked in Japan, why not in the States?
TQM became all the rage in the 1980s and early 1990s, but there was one problem: the American companies that adopted it didn't find nearly the same successes as their Japanese counterparts.
Imperfect Copies
Western companies ran into trouble because they created imperfect copies of TQM. They often only adopted its most visible, tangible elements or they set up cross-functional teams and gave people access to data about quality levels, but failed to create the organizational climate needed for employees to feel secure enough to suggest and implement improvements. They abolished end controls without having nurtured a sense of responsibility for errors throughout the organization. Top managers also thought they could outsource TQM's implementation to consultants, without realizing their close involvement was necessary to signal quality management as the key focus of the entire organization. Thus, since the resulting TQM copy was imperfect, lacking the nuance and complexity of its original, it became useless at best and harmful at worst.
Replicating a successful management practice is a very difficult task. As professors Sidney Winter from the Wharton School and Gabriel Szulanski from INSEAD argued, organizational practices — especially those that lead to competitive advantage — are often highly complex. They consist of multiple components, some of them tangible (such as technologies and procedures), but many of them tacit and intangible (such as organizational culture and informal networks), that are subtlety interwoven. These practices, which developed and evolved over many years, are often so complex that the firms that implemented them aren't completely sure how they work. So it's no surprise that Western firms erred. They took a highly complex system and reduced it to something much simpler.
They also added new features to the system, some of which ran counter to the spirit of TQM. As professors J. Richard Hackman from Harvard University and Ruth Wageman from Columbia University discovered, a majority of American organizations added performance measurement and financial reward systems that rewarded employees for achieving quality goals. Although rewards and incentives are commonplace in many organizations, they were antithetical to the philosophy of TQM, and Deming himself explicitly argued that they were counterproductive.
This is a very common pattern. In an attempt to replicate a best practice, firms end up transforming a complex practice into a much simpler one, and this simplified version, which is much more alluring and easier to copy, is transferred from one firm to the next, becoming less and less useful — and eventually harmful.
Yet, the American managers weren't deliberately adopting a deleterious practice; they were genuinely trying to improve their organizations. They did what managers often do: they looked around them to see what seemed to work for others. And TQM was a great success in Japan, so it seemed to make sense to try to emulate it.
But, in the end, they, like all of us, became suckers for success. They blindly adopted a practice based on nothing but its prior success, implemented it poorly, and then overlooked its nefarious effects once they committed to it.
Unfortunately, poor replication is only one of many ways a practice's association with success can lead organizations astray. Let's look at a few others.
Benchmarking Is BS
Managers often unknowingly adopt bad practices when they try to benchmark their organizations against the other companies in their industries.
I see this all the time in my own home organization, London Business School. Whenever, for instance, an MBA curriculum review is being discussed, some dean or senior administrator will say, "Let's do some benchmarking." Which means: "Let's see what others are doing (and then do it too)." The outcome of such a benchmarking exercise is usually a list of ten or so of our main competitor business schools (i.e., Harvard, INSEAD, Wharton, and so on), of which, say, seven have adopted a particular course structure. Then, some top dog says, "So, we should really do it too," and everybody nods. This is a wonderful way for a bad practice to spread.
Not everyone needs to be doing something for us to believe it's a good thing. Sometimes just the top performers need to be doing it. This is because we are all inclined to pay the most attention to the best-performing companies in our industry and only to those. For instance, some years ago, whenever GE did something new (such as Six Sigma), many firms were inclined to immediately imitate it. Like a lot of people, the managers at these organizations assumed that GE's leaders knew it all: "Surely, when they do it, it must be a good thing, because they're such a successful firm."
Indeed, research has confirmed that organizations tend to imitate the actions of other companies that stand out as successful, even when it is clear that the newly developed practice is not the cause of the company's success.
The press does it, too. Journalists habitually write about top-performing companies and interview their CEOs, rather than the average Joes. We, admittedly, do it in business schools: we teach cases about the best, blue-chip companies, ignoring the less-sexy average types.
Blame It on Perception Bias
In an experiment I performed at the London Business School with my former PhD student Xu Li (now an assistant professor at the European School of Management and Technology in Berlin), we noticed that focusing on the "best" is a very general and human trait.
Li and I asked people to look at a file that contained information about a thousand firms, including ten years of performance data on each and how they ranked over the course of the ten years. Firms could follow one of three strategies, which we generically labeled A, B, or C (in order not to bias people in any way toward one or the other). We displayed this information on a computer screen so that we could unobtrusively use eye-tracker technology to monitor what they were paying attention to. We then asked participants a simple question: which strategy do you think leads to the highest performance, on average?
Monitoring their eye movement, we noticed that people usually first started scanning the entire content of the file; they looked at individual firms in detail, their financial performance, and the strategies they followed. However, after a short while — usually no more than a couple of minutes — they gave up trying to assess every individual company: there were just too many. Then they turned to a simple course of action: they glanced over the file, looking for one particular thing among the different firms: their performance rank among the thousand companies. As soon as they spotted a high-ranking firm, their eyes stopped scanning, and they assessed the firm in more detail, specifically focusing on what strategy (A, B, or C) the particular company was following. Toward the end of the file, they had seen enough and had made up their minds; a large majority of people concluded that strategy B was the superior strategy.
However, they were wrong: strategy B, on average, led to significantly lower financial performance.
How come the majority of people got it so wrong in this experiment? Because of one simple manipulation that we did, but one that occurs all the time in reality: the different strategies (A, B, and C) also led to different levels of variance in firm performance.
The performance of the firms following strategy A or C was quite evenly distributed: most firms performed pretty well, although there were also some that slightly underperformed and a handful that performed really well.
The performance of firms following strategy B, by contrast, was much more varied. Most of them underperformed, with some doing really quite poorly, but a good number performed really, really well: they were among the top performers in the industry.
How come then that people got it wrong, thinking that strategy B on average led to the best performance (while it led to the worst)? That's because they were drawn to the top performers. Since most of the very top-performing companies had adopted B, the participants concluded that B must have been the best strategy for everyone. But they were wrong. These firms were merely the exceptions to the rule. (See figure 1-1.)
We experienced real-world confirmation of this bias when we interviewed members of the Chinese pharmaceutical industry who told us that companies that engaged in new product development had outperformed those who didn't from 1991 to 2000 (the first decade of privatization in the industry). Yet, when we analyzed the real numbers, clearly the opposite was true. But, as with the firms that adopted strategy B in our experiment, their variance was much higher — so much higher that, indeed, the few top performers were often new product developers. When we asked the interviewees to justify their answers, they cited the top-performing companies in their industry as a case in point.
Like the participants in our experiment, the interviewees overlooked the fact that most firms that adopted a new product development strategy performed below the industry average. They — like all of us — focused solely on the few best-performing ones.
Champions Are Deceptive
Practices don't spread by themselves; when a firm is contemplating adopting a particular new practice, the practice will often have an internal champion, someone who is convinced that it's a good idea. And the champion will try to convince others in the firm of its merits.
To promote the practice, the champion will often invite a speaker or two from other firms that have experience with it. Needless to say, he or she won't invite someone from a firm in which the practice was a complete and outright failure; no, the champion will make sure the invited speakers are equally committed to and enthusiastic advocates of the practice. As professor Mark Zbaracki discovered in his famous study, this is one of the reasons why TQM spread so rapidly: external speakers exaggerated its benefits and glossed over the occasions when it did not work.
Subsequently, firms will begin to test the waters by implementing the practice in a few units. After a trial period, the internal champion will invite representatives from some of these units to talk about their experiences to units that haven't adopted the practice. These internal champions — as was the case with the spread of TQM — act in similar ways as the guest speakers, and so they help to proliferate the myth.
Because these information sessions endow the practice with success from the very start, the harmful practice spreads quickly and is difficult to kill. Since the practice has worked wonders in other organizations, no one questions its success. If there's a problem, managers blame the implementation, not the practice itself. So the practice remains associated with success — and survives.
Quick Wins Make Us Losers
Once a practice is adopted and brings on immediate results, its association with success grows. We've seen this already with IVF clinics: genuine short-term benefits (higher rankings and prestige) can confer an association with success upon a particular practice or strategy. But, in the long run, the effects can be negative.
I'm often surprised that this surprises people. Everybody understands that short-term effects are often different from long-run consequences. That's the whole idea behind investing in something: we accept short-term pain (money out the door) in return for bigger, long-term gain (more money coming through the door). Often it works the other way around, too. A bit of short-term gain can cause a lot of long-term pain.
I strongly believe that whenever an organization is deciding whether to adopt a particular new practice, strategy, or process, it should first explicitly raise the question, "What might be the consequences in the long run?" Then it should think through the long-run consequences, because, of course, these might be different from the short-term ones.
Time Moves On, but Practices Linger
The last factor might also be the most important, because I suspect it's the most common: the transfer of a practice from a different context or time when it did bring benefits. In this case, the practice did not start out as harmful, but as time passed or circumstances changed, it became inappropriate. But because of its initial association with success, it persists.
Many of the ways in which firms have organized themselves — their structures, their formal and informal processes and systems — are there for historical reasons: someone at some point decided a particular thing would work best, and the firm stuck with it for years, if not decades.
This is not necessarily bad if circumstances don't change, but business environments have the nasty habit of changing all the time. The best way of doing things then isn't necessarily the best way of doing things now. But often companies — and whole industries — are slow to adapt.
Consider, for example, buyback guarantees in book publishing. In the 1930s, during the Great Depression in the United States, many bookshops — largely small, independent stores — could no longer afford to buy books from publishers to sell in their stores. To keep sales going, Simon & Schuster began to guarantee booksellers that they could return any unsold books at the publisher's expense; the store owners would only have to pay for the books they sold. The practice was a success because it enabled Simon & Schuster to continue selling books, even though its direct clients had little money. Soon other publishers followed suit, until everybody in the industry did it that way. The practice persists to this day. Or, as an executive of Beacon Press put it to me, "[The practice] seems to be a permanent feature of the American publishing and bookselling scene."
(Continues…)
Excerpted from "Breaking Bad Habits"
by .
Copyright © 2017 Freek Vermeulen.
Excerpted by permission of Harvard Business Review Press.
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