The Stupidity Paradox: The Power and Pitfalls of Functional Stupidity at Work by Mats Alvesson & André Spicer

Author:Mats Alvesson & André Spicer
Language: eng
Format: mobi, epub
Publisher: Profile Books
Published: 2016-06-01T17:00:00+00:00

6

Imitation-Induced Stupidity

Following the crowd

In the middle of the twentieth century most US corporations saw themselves as an unrelated portfolio of different activities. The largest corporations typically owned a wide range of different businesses which had little to do with each other. At the time, business leaders assumed that these loosely related business conglomerates were the best way to operate a firm. It gave firms the advantage of being able to manage risks across different sectors and countries, it helped them share resources, and it brought ample opportunity to grow.

By the late twentieth century this had all changed. The idea of the conglomerate operating in multiple business areas had gone out of fashion. Firms began to radically restructure themselves by selling their unrelated businesses. They focused on what they thought were their ‘core competencies’.

What caused such a radical shift?

The typical reason provided is that a focus on core competencies was simply better. Companies that concentrated on activities where they had a genuine edge were more likely to survive and thrive. Capital tended to flow towards those firms that had a genuine advantage in a particular sector. Hence resources would not be tied up in substandard operations.

However, a more careful look reveals a quite different picture.1 Often companies decided to focus on core competencies because other organisations were doing the same. The concept was popular, and like any bandwagon, people wanted to jump on it. There were also many influential people from management gurus to academics and consultancy firms calling for firms to refocus their operations in this way.

One particularly influential group who championed the idea of core competencies were securities analysts. These are the people working for large financial institutions who recommend whether investors should buy, sell or hold shares in a particular company. They estimate how much a company is worth. Often these estimates can have a big influence over how much companies’ shares will actually be traded for.

Analysts are often seen as people who make objective assessments of the value of a company, but their judgements often depend on prevailing fashions. During the tech boom, for instance, analysts rallied to overvalue the shares of technology companies. This also applies in the case of core competencies. When the idea came into fashion, analysts started to systematically overvalue the shares of companies that claimed to be refocusing their business to that end. This gave companies big incentives to follow the herd and engage in corporate restructuring around core competencies. If they did this, they would probably get positive recommendations from analysts, the companies’ shares would go up, and the CEO’s bonus along with them.

This all sounds fine in the short term, but in the longer term it would often create problems. Many of the predictions about the benefits of refocusing companies did not come true. Restructuring a company around core competencies sometimes produced superior returns, but often the financial results would be disappointing. As a result, the analysts’ predictions were often wide of the mark. You might think this was a big problem for them, but mostly it was not.

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