When knowledge hurts

Over the last decade or so companies have been told till it was a nuisance that their knowledge is their ultimate (if not only) source of competitive advantage. They have been encouraged – by management gurus, academics, and ample management consultants alike – that they should invest in knowledge development, protect it, and makes sure it gets identified, codified, and even put on the balance sheet.

The advice was to carefully identify best practices and make sure that you have systems that help these practices to be shared throughout the organization. This way, you will make optimal use of the great good and surely a healthy return will follow – or so the preachers said.

Many companies responded, as advised, by setting up internal systems that could be used to store and access all sorts of documents, as well as systems to aid the identification of experts in the organization and ways to contact them for advice.

But have these knowledge management systems turned out to be as good as was promised to us? Well… let’s say that a few caveats have emerged.

Because what we sort of forgot in the torrent of knowledge euphoria is that this stuff can also come at a cost. The cost of actually finding it, for example, in the jungle of corporate databases, but also the cost that comes with the fact that re-using prior knowledge doesn’t necessarily make you very original. And that’s a problem, especially when you need to stand out from the crowd.

Professors Martine Haas from the Wharton School and Morten Hansen from INSEAD, for example, examined the use of internal knowledge systems by teams of consultants in one of the big four accountancy firms, trying to win sales bids. They measured to what extent these teams accessed electronic documents and how much they sought personal advice from other consultants in the firm. They figured that, surely, accessing more knowledge must be helpful, right?

But they proved themselves wrong; to their surprise they found that the more internal electronic databases were consulted by these teams the more likely they were to lose the bid! Likewise for seeking advise from colleagues. This effect was especially pronounced for very experienced teams. These guys were much better off relying on their own expertise than trying to tap into experiences by others, whether it was in the form of electronic stuff of external advice.

Haas and Hansen figured that the opportunity costs of accessing all this prior knowledge must be huge; big enough to offset any potential benefits. Searching through the plethora of documents and soliciting advice from colleagues actually withheld the teams from making substantial investments into putting together a truly original and suitable proposal.

Things were even worse in situations in which competing firms were simultaneously bidding for the same lead, and being able to differentiate yourself from these rivals became crucial. In these cases, utilizing prior knowledge seemed to lead teams to develop cookie-cutter solutions when being original and innovative was what was really needed. As a result, they lost the bid.

The only times that a team benefited a bit from accessing internal knowledge sources was when it concerned a very inexperienced team. In such instances, talking to a few internal experts improved their chances of putting together a winning proposal. However, the internal document databases were always useless at best. The more these rookies tried to tap into the mountain of electronic documents available to them, they worse their chances of coming up with the winning bid.

The advice to derive from this research? Shut down your expensive document databases; they tend to do more harm than good. They are a nuisance, impossible to navigate, and you can’t really store anything meaningful in them anyway, since real knowledge is quite impossible to put onto a piece of paper. Yet, do maintain your systems that help people identify and contact experts in your firm, because that sometimes can be helpful. But make sure to only give your rookies the password.

Corporate Social Responsibility – nice, but does it earn you any money?

The question “should corporations actively invest in socially responsible stuff, or should they simply focus on making money?” continues to linger and re-emerge on the business agenda (especially, it seems, around the time that business-minds receive the call to once more swarm to Davos).

People are then quick to shout “but they are not two different things; behaving in a socially responsible way will, in the long run, also make you better off financially!” but, in spite of the latest tally of 225 academic studies trying to provide hard evidence of the existence of that relationship, proof of that statement is unfortunately actually pretty hard to find…

And I say “unfortunately” because it would of course be nice if the socially responsible companies would also get financially rewarded for their honorable endeavors. But it is hard to provide solid evidence for that. For example, although we do know from research that socially responsible companies are usually the better-performers, the tricky thing is that, as we say, the causality often seems to run the other way around; once firms are beginning to make a healthy profit, they start acting in socially responsible ways. If losses pile up, the responsible stuff is the first to go out of the door. Hence, socially responsible behavior does not make you a better performer; good financial performance leads firms to behave in more responsible ways. It seems it is a bit of a luxury product that we only indulge in if we feel we can afford it.

However, on the bright side, there is certainly no evidence that firms acting in socially responsible ways perform more poorly as a result! So, if it doesn’t cost you anything, why not do it?! Yep, you will have to spend a bit more money, not using suppliers that employ children to produce their stuff, recycling your toxics although you could have had it legally dumped somewhere else, and invest in some services for your local community and the family of your employees although you could have told them to bugger off and take care of themselves. However, these niceties may also appeal to your customers, to green investors, will make you more attractive as an employer, and so on. And apparently these costs and benefits seem to largely average out so at least there seems no reason not to be a good guy!

However, it would still be nice if the socially responsible types were actually better off would’t it…

Professors Paul Godfrey, Craig Merrill, and Jared Hansen, from Brigham Young University and the University of North Carolina, came up with a clever insight why the socially responsible types may be better off after all. They didn’t just look at the social and financial performance of all sorts of companies but they decided to specifically focus on companies that got into trouble because some negative event had happened to them. This could be the initiation of a lawsuit against the firm (e.g. by a customer), the announcement of regulatory action (e.g. fines, penalties) by a government entity, and so on. Then they measured what happened to the share price of the company as result of the event. And the interesting thing was that how much you were punished by the stock market for the negative news depended very much on how much of a socially responsible company you were.

Firms that scored low on a social responsibility index saw their share price plummet if they had to announce a negative event. Firms with very good social track records did not see their share price go down that much. Paul, Craig, and Jared concluded that, apparently, your socially responsible reputation acts as some sort of an insurance; when something bad happens to you (in the form of a serious customer complaint or a government fine) investors conclude that you probably made a genuine mistake, and that you will definitely do better next time, and that there is nothing structurally wrong with you or to worry about. However, when you are much more of a social villain, the stock market washes its hands of you, drops its financial support, and makes your share price plummet.

Thus, good guys are better off after all. And the dollars you spent on being socially responsible do pay themselves back and turn into profit, especially when you are in a rot.

Who to turn to in a downturn? Insights from top performers in meagre times

Of course I get asked quite a lot, lately, is there any research on firm strategies in a downturn? And I have to say, the answer is (unfortunately) pretty much “no”.

There is a lot of research in the field of strategy on companies that are in trouble. There is also quite a lot of stuff on companies that operate in industries that are in decline, for instance because their business model is antiquated or their technology has been surpassed. But there is nothing, to the best of my knowledge, on what corporate strategy to follow if the whole planet is in decline…

Someone also asked me, the other day, do you know of any companies that do particularly well in a downturn? And actually, I realised, that’s not a bad place to start. I mean, perhaps we can learn something from these businesses; in terms of insights that other companies can also apply in their attempts to weather the storm. So let me give it a try. I am going to – quite cowardly – not present these deliberations in the form of insights or findings but in the form of questions. Questions you can ask yourself, as a company, to try to think of ways to improve your chances of survival whilst the world is in a downturn.

Be Morrisons (not Waitrose)

The first, fairly obvious, type of business that does relatively well in a downturn are the ones that offer products or services at comparatively low costs. Their price-quality ratio is low, relative to their direct competitors. For example, supermarkets like Morrisons, which compete on price, are currently showing much better numbers than a more upmarket quality provider like Waitrose. These companies always provided that type of price-quality ratio but now more and more customers put higher weight on the price aspect of the ratio, which makes Morrisons flourish.

It seems quite obvious but, nevertheless, it is worth thinking about. Is there anything you can do to offer your (potential) customers lower cost options (probably at the expense of some quality)? I am often a bit surprised by how reluctant businesses are to give up margin when times are tough. It seems many firms think they can’t afford to lower their margins because that’s the remaining source of income while customers are deserting them. However, fewer customers may desert you if you do lower your margins! You may even win a few. Moreover, many customers are willing to sacrifice quality for price, IF you give them the choice.

Be a shoe repair shop

But, as said, that’s the obvious one. One step further are the types of businesses that help companies extend the life of their current resources. Think of car part dealers or shoe repair shops. They actually grow during times of decline (as they are doing now)! People and companies are having their cars repaired rather than invest in a new one. Can you, as a business, think of a product or service that you can offer to help your clients get more out of their old shoes? Can you offer upgrades of existing technologies? Can you offer marketing services that extend the lifecycle of your client’s product?

Moreover, do you have clients that are like shoe repair shops and car part dealers. Or could you make them your clients and offer them something they might be interested in? After all, they can afford it, and probably could use some help handling their exceptional growth.

Be a business school

Finally, can’t you be more like a business school? Seriously. During the last (mini)crisis in 2001, for example, applications to London Business School’s full time MBA programme doubled. What better time to do an MBA then during a crisis? People figured that the opportunity cost of their time was now relatively low; it is not like you’re going to get a huge pay rise or bonus during the crisis years (unless you’re a City investment banker of course…).

Moreover, by the time that they graduate, about one and a half years later, the crisis may have largely blown over and they are in a superior position to catch the first wave. Hence, be more like London Business School; clearly that can never be bad advice.

Soft stuff (such as caring for the community and the environment), shareholder value orientation, and take-over protection mechanisms

Caring for the community and the environment, shareholder value orientation, and take-over protection mechanisms?! What do they have to do with one another?

Well, quite a bit it appears. Let me explain.

First of all, do we like it that firms can adopt take-over protection mechanisms (such as poison pill constructions)? “No we don’t!”, do shareholders proclaim in chorus. Because the threat of a potential take-over is a great way to make sure that CEOs don’t do anything that does not maximize the value for shareholders. Remove that possibility and these bloody CEOs will do all sorts of silly things that are not in our interest.

And I am afraid that is at least half true… And one of these silly things is attending to issues such as caring for the natural environment and the community. We – the wider public – may like it if corporations do that kind of stuff but it is hardly clear that shareholders do; after all, caring for such soft stuff comes at the cost of the hard stuff: cash.

Aleksandra Kacperczyck, from the University of Michigan, examined this issue in a clever way. She examined 878 public firms in Delaware between 1991 and 2002. The interesting thing about Delaware is that in the mid 1990s, due to a series of court decisions, hostile take-overs suddenly became a lot more difficult. And what Aleksandra found is that, after that fact, Delaware companies started to pay a lot more attention to catering to the community and to the natural environment. All of a sudden, it was safe for companies to do such stuff, without the threat hanging over them that they could get “punished” for it by means of some hostile take-over by another company that thought it could make more money by getting rid of all that expensive soft stuff.

Did shareholders like it? Well, they didn’t applaud the court decisions (to say the least) and the fact that now corporations could divert valuable cash to such silly things, but they had to grind their teeth and grudgingly accept it.

But were they right; that it was going to cost them money? Well, not exactly.

Aleksandra also measured what happened to the long-term shareholder value of the corporations that started to engage in the fluffy “caring for the environment and community" kinda stuff. Shareholder value actually went up! The long term market-to-book ratio of these firms started to rise as a result of these fluffy actions! The shareholders, in spite of their doubts and grudges, were better off.

A classic win-win situation appeared; having been freed from the threat of hostile take-overs enabled the firms in Delaware to do nice things for the community and the environment, which actually paid off in terms of hard cash in the long run. But there was one catch…

In a brainwave, Aleksandra decided to also look at what happened to the levels of executive compensation (in the form of salary, bonuses, and other annual remuneration perks) of the companies that found themselves shielded from the threat of hostile takeover; CEO remuneration went up… Apparently, now immune to takeover threats, top executives not only started attending more freely to the interest of the wider community but also to their own private interests. They let others share in the wealth, but didn’t forget themselves either…

Information overload – and how to deal with it (if you’re the one loading)

Most decisions in organisations require information. And we have to actively look for that information. We approach colleagues who have dealt with similar issues, are knowledgeable about the context, the customer or the technology, and try to incorporate their experiences and insights.

Nowadays, in our “knowledge economy”, many companies have realised the value of this internal expertise and set up databases, accessible through the firm’s intranet, that we can access and search. But now the problem is – more often than not – there is just so much of it…!

We’re swamped with information! How many databases can you access? How many documents can you read?! How many colleagues’ brains and wisdom can you electronically pick?!

And this is actually not only a problem for the people looking for information. In many organisations the providers of knowledge get rewarded when others use their stuff, in the form of increased respect in the company, heightened status, and sometimes even in terms of hard cash after their annual performance evaluations. How can you as a provider make yourself heard and seen in the plethora of the information quackmire?

Professors Morten Hansen and Martine Haas – at the time at the Harvard Business School – examined exactly this issue. They examined the electronic databases of one of the Big 4 accountancy firms and surveyed its 43 “practice groups” on their strategy of what documents to upload and when. And they came back with some pretty clear insights into what works and not.

You have to understand that these different practice groups face some simple but concrete choices: how selective are we going to be in terms of the documents we upload; are we going to upload pretty much everything we get our hands on or are we only going to put up a mere fraction of what we have? What is the maximum number of files we would like to put onto the system? Do we cover a fairly wide range of sub-topics or are we going to be much more concentrated in terms of the subjects we cover?

The trade-offs are pretty clear; if you upload very few documents, people can only access very few documents. But if you put up many of them, potential users may be turned off, lose the forest for the trees and turn their attention somewhere else in disgust (while swearing at you for the sheer overload and making rude hand gestures to their computer screen). But where does the balance lie?

Hansen & Haas found out that where the balance lies depends on what the topic is that you are publishing on. If the practice group was providing information on a topic that was covered by quite a few other groups (such as for instance “cost management”, “capital & asset management”, “financing & IPOs”), they were much better off being very selective in what they put on their site. Those who made few documents available quickly gained a reputation as the group which always delivered high quality stuff without swamping you with irrelevant, low-quality distractions. More people, as a result, accessed their pages.

In contrast, groups publishing on topics which were much less widely covered (such as “Peoplesoft”, “hospital service delivery” or “call centres”) were better off providing a much wider range of documentation, that readers could really sink their teeth in. They developed the reputation “for topic X you really need to go to practice group A” and flourished as a result.

Hence, the various suppliers of information within the company competed with each other for the attention of the employees looking for relevant knowledge. And, like in any market, they needed to adapt their strategy based on the specific product they were offering.

Human nature: Self-interested bastard or community-builder?

Whenever I ask executives how they should make an organisation more entrepreneurial, more customer-focused or simply more profitable they virtually always come back with: “incentivize people”.

Reward people for their ideas, their efforts and initiatives and they will deliver.

But always, when I ask them, if you would be on a fixed salary, would you still do your best to come up with new ideas, be entrepreneurial and deliver the best value you can for your customers? And then the answer is, invariably, “yes I would, because I don’t do it for the money”. Then people say they like being good at what they do, initiate new things, and deliver customers the best they possibly can.

But why do we always assume that other people are motivated – and motivated only – by money, and the way to get them to do stuff is by financially incentivizing them, but we? no we do things out of intrinsic motivation, because we want to do the best we can and contribute to the success of our firm. Is everybody really so different from us?

If you hadn’t noticed: that was a rhetorical question.

So why do we assume other people are only motivated by money? My guess is it goes back to why we organise our firms the way we do. How we, in our society, organise our companies is basically based on two sources: 1) The Roman army (i.e. a hierarchy with unity of command), 2) economics.

Economics has had a huge influence on how we govern our firms. For example, the use of stock options to incentivize and reward top managers comes straight out of “agency theory”, and the spread of this practice has been linked to the spread of “agency theorists” across business schools in the US after which, gradually, the phenomenon started to diffuse. And there are other examples.

Yet, economics – including agency theory – works from the assumption that people are rational and self-interested. The will work if they get rewarded for it. But if they don’t receive a direct reward or nobody can really observe their efforts, they will “shirk” and be lazy. Under this logic, indeed, you have to incentivize people; otherwise they won’t do a thing.

And I guess to some extent, we are indeed rational and self-interested, and hence motivated by money. However, there is another fundamental aspect to our human nature, one which through millions of years of evolution has made us the way we are: we like being part of a community and contribute to the well-being of that group.

Because we, humans, evolved as being part of a tribe. And people who were purely self-interested, shirking and lazy would be kicked out of the tribe, clubbed to death, if not consumed for dinner. So our gene base evolved into making us a bit self-interested but equally also community-lovers. Our deep human nature is that we all like doing things not only for our direct individual reward but also because it contributes to the community that we are part of. This community used to our tribe. Nowadays, it is often our organisation.

And if you, as a manager (i.e., headman) manage to tap into that deep fundamental need among your employees, you can build a powerful firm indeed. People love to do stuff that strengthens their firm, fulfils them with pride, and makes us feel stronger as a whole. We don’t need to be financially incentivized to do that; it’s our human nature.

Managers and leaders: Are they different?

All these articles about what are the characteristics of a good leader or CEO always make me feel a bit sceptical. Sometimes even nauseous. It always strikes me, when I look into the history of a company and analyse its strategic development that they seem to need top people with widely different characteristics at different points in time.

Take my favourite little English company; the model train maker Hornby. When they were in trouble about ten years ago, its board appointed a tough guy: Peter Newey. He slashed costs, rigorously cut in their portfolio and fired a bunch of people. He wasn’t the most popular guy on the block (he was wise enough not to live in the company’s home town Margate; he might have ended up with a knife in his back) but – be it in hindsight – people also respected him: it was what the company needed at the time, and it is doubtful they would have survived without him.

But then Hornby hired a people guy: Frank Martin. The first thing employees told me about him was: “he is extremely good at managing relationships” (something Newey wasn’t exactly renowned for; and that’s a euphemism). And he was; he built superb relationships with suppliers, customers, retailers and investors. And the company flourished.

Yet, could he have done the tough turnaround job? Doubtful. He simply has other qualities. He too was the right man for the job at the time – just like Newey was.

You see the same thing at companies over and over again. Take Apple; in its early days, the energetic and charismatic Steve Jobs was exactly what the spawning company needed. However, when down-to-earth CEO John Sculley took over (much to the chagrin of Jobs), the company had one of its most profitable runs ever; Sculley didn’t innovate, inspire bold new moves, or initiated great change; he focused on making money, and did that very well.

And that is what the company needed at that point in time. Later, when they needed to be pushed and driven into a new direction, Sculley could not give them one; it was Jobs’ time again, to inspire, initiate and make the company grow. And again he did that very well. The same happened at the famous Swiss watch-maker Swatch: Ernst Thomke created the organisation that led to the emergence of the innovative Swatch; subsequent CEO Nicolas Hayek took the invention and relentlessly managed the organisation into a long streak of dominance and profitability. There is not one type of leader that fits all; different companies, at different times, need different people.

In the classic Harvard Business Review article “Managers and leaders: Are they different?” author Abraham Zaleznik’s answer to this intriguing (and slightly provocative) question was an unambiguous “yes”: Leaders inspire, are emotional, if not neurotic, and they are born that way. Managers are very different; they are rational, balanced, unemotional and easy to get along with (be it perhaps slightly yawning). And it is not that one is superior over the other; different firms, at different stages of their development, need someone who inspires and does extraordinary things. But at other times, you need someone rational and objective, and perhaps slightly boring. Such a person may never be “a leader”, but is a damn good manager.

Sometimes we need to be inspired, take risks and dream up wacky things. Sometimes not. Banks come to mind. Sometimes, there is nothing wrong with a boring banker. Or a boring politician.

In a crisis, innovate

Recently, an executive – an ex-student – told me about his company. The company has a handful of competitors (it is a local business) highly similar to itself, and they’re all losing money in the current economic climate. Now one competitor – the worst-performing of the lot – has started to accept assignments for a fee below its cost price, just enough to cover its variable costs and at least earn back a tiny bit of its fixed costs. My ex-student asked me, “What can we do?”

The answer isn’t easy. But it is of course a rather typical situation to be in. It happens in most industries in trouble; some bloody competitor – often the lousiest one of all – starts to sell below cost price, out of pure desperation. Actually, my ex-student’s company responded in a way that is just as typical: they said, “But their product is inferior; we deliver quality, and customers will always want to pay for that” (and stuck to their comparatively high price). But customers didn’t. And they seldom do. Even if there is a minor quality difference – and it’s usually just minor; at least in the eyes of the customer – if the price difference is large enough, you’ll lose a lot of clients; more than you can afford.

So what can you do? What else can you do than lower your prices too, tighten your belt, hold your breath, and hope the crisis blows over before you bankrupt yourself? Because that’s what companies usually do.

I’d say the phenomenon is rather common, so the solution can’t be.

It reminded me of the English newspaper business some years ago. All quality newspapers were in trouble; stuff had started to move on-line big time, free newspapers such as the Metro had flooded the market and, on top of that, the general trend was that people simply read less. The four main players in London – The Guardian, The Times, The Daily Telegraph and The Independent – were all in decline but The Independent was the one widely expected to fall the first. The others had deep pockets due to rich owners and, due to a price war several years earlier, which had hit The Independent hardest, it was basically broke.

Now, The Independent could have done what most companies in such a situation do: moan about it, cut some more costs (or whatever is left of it) and attempt to prolong an inevitable death. But it didn’t. It took a plunge. It launched a small-sized version of its newspaper; the denounced “tabloid” format. All newspapers had been talking about it for a long time, but everyone had dismissed it as too risky (customers won’t like it), phoney or plain cheap. But The Independent launched it, and it worked (customers loved it). They survived.

Was it a coincidence that out of the four main players it was The Independent that launched the thing? Of course not. It was The Independent who basically had nothing to lose; it would have been the first one to go under had the industry continued as is. But it chose to not just prolong its demise: it took a plunge, and recovered.

The same happened to the famous Southwest Airlines. In its early days, when it was in deep trouble, it had to sell one of its four planes. Yet, it didn’t try to just save some more costs and continue with 75 percent of its operations, prolonging an inevitable decline; it took a plunge. It said “we’re going to run 100 percent of our operations but with just three planes!” and, in the process, invented the widely successful low-cost airline model, having scrapped all frills and complications, combined with the emergence of a must-succeed culture.

So, when you’re down: innovate. Don’t just wait for the inevitable to happen; prolonging your decline out of some false hope that you’ll weather the storm. Storms kill; get out of it while you can.