I recently had the privilege to interview Freek Vermeulen. He is a professor of strategy and entrepreneurship at the London Business School and the author of “Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business.”
Kurt Manwaring: Welcome. Before we begin could you tell us a little bit about yourself and your association with the London Business School?
Freek Vermeulen: I’m Freek Vermeulen, professor of strategy and entrepreneurship at the London Business School. I joined the London Business School in the year 2000, first as an assistant professor of strategic and international management, then an associate professor, and now I’m a full professor of strategy and entrepreneurship.
This means that my main task is research. I do research on the topics of strategic management and I also study corporate entrepreneurship. I also teach, albeit not very much, about one class every week. And that is mainly to our MBA and our executive MBA students. I teach an elective called Strategies for Growth, although I also teach a course called Corporate Strategy to our PhD students.
Kurt Manwaring: One reason you chose your career is because you have always been drawn to the study of organisations. At what point did you move beyond interest alone and identify specific ways in which you could contribute to the study of organisations while making a living?
Freek Vermeulen: Well strangely enough I was always interested in organisations. Even before I became an undergraduate student at Tilburg University, in the Netherlands. In fact, I specifically chose to study business economics because I was interested in organisations. And later I also added sociology – organisational sociology – to study. I had always been interested in understanding organisations, but I also realised I didn’t necessarily wanted to be in one. Meaning that I didn’t necessarily wanted to be a manager.
And therefore I thought probably I can be a management consultant. I can interact and be involved with lots of organisations and help make their strategy without really being a manager myself. And it’s only when I was studying in Tilburg that I learnt that there was also something like academic research in the topic of organisations and in the topic of strategic management. And when I found that out, that you could get PhD studying organisations, then it immediately clicked and I realised that’s what I wanted to do.
I wanted to study managers, because I find them fascinating, but I didn’t want to be a one. And in a way that’s still the case. I see myself a little bit like a criminologist who studies criminals. I find them a fascinating subject, managers, but I don’t necessarily want to be one. And a criminologist might have no inclination to stab anyone or rob a bank, and similarly I have no inclination, and probably no talent, for being a manager. But I do find them a very fascinating subject to study.
Kurt Manwaring: You have a writing style that is equal parts academic, conversational, and pithy. When does your personality become an asset in your writing, and when might it be considered a liability?
Freek Vermeulen: I perceive here a slightly provocative, if not a suggestive, question! And definitely rightly so. Because one thing is right about this question: I do think that my writing style could indeed be considered a bit of a reflection of my personality. I am definitely an academic, that’s who I am, that’s my identity, that’s what I am. So indeed, I base my writing and my insights on academic research and on academic theory and insights from academia.
However, and you’re right about that as well, I very much enjoy not only talking to other academics and just writing for other academics. I like making academic insights and research findings accessible for other people, normal people; people in the reality of organisational life. And therefore it’s indeed also a different writing style and perhaps what you call conversational. I hope it’s a very accessible writing style, although the content is definitely very academic.
You also say pithy. Yes, well, I guess that could be an asset in the sense that some people really like that. And it could also be a liability because I’ve also learnt that some people really don’t like it at all. And although it’s not a deliberate choice, I’m actually quite happy with that. I would much prefer writing a book that some people love and others hate than a book about which the vast majority of readers say, well, it’s okay. So perhaps that’s also a reflection of my personality, I don’t know. As said, it’s not a deliberate choice to write a book like that – a love it or hate it book – but eventually I’m quite content with it.
Kurt Manwaring: One of the most misused words in business seems to be strategy. How have you seen strategy misused in business and how do you define the term?
Freek Vermeulen: Well, first of all, I think I’ve seen it misused very often. I think I’m actually not exaggerating, although I’m perhaps being slightly provocative if I say that nine out of ten companies really don’t have a strategy. I see quite a lot of CEO presentations of the strategy of their company, for instance when I give a keynote speech or so at some conference or at some other occasion. Really, the majority of times when the slide strategy comes up I do not see a strategy.
That’s because most of the times most companies will say something like, our strategy is to be the top one or two player in every business in which we operate. Oh, I’m sorry, that’s not a strategy, that’s a goal. And that’s a very nice and ambitious goal, there’s nothing wrong with the goal, but strategy is about how are you going to do that.
Similarly I very often hear, our strategy is to grow 20 percent by 2025 or something like that. Well likewise, that’s a goal, you know. What I would like to hear is the strategy of how you’re going to achieve that. There’s nothing wrong, I guess, with having goals or even ambitious goals, but it’s not a strategy. A lot of companies that I see also proclaim their strategy to be the things that they’re doing anyway. For historical reasons they’re operating in businesses A, B and C for instance, and they will say our strategy is to operate in businesses A, B and C. Well you already were, you know?
To me a strategy is really a set of deliberate choices. And I mean a set of choices in the sense that the choices fit together and make for a coherent combination. And most companies that I know of haven’t really made that set of choices.
Kurt Manwaring: What was the catalyst for Breaking Bad Habits and how did you decide on a partnership with Harvard Business Review Press?
Freek Vermeulen: Well, what was the catalyst for the book, “Breaking Bad Habits,” is really a sentence, and a sentence that I hear fairly often when I get to know a new company. And that’s the sentence, well, that’s how we’ve always done it around here.
And I remember one particular senior executive, I can’t give too many details, but I was asking him about a particular process in his firm and he couldn’t quite explain it to me. And eventually when I pressed a bit further he got slightly annoyed with me and he just said, Freek, we’ve always been doing it this way, and look around you, everybody in our industry does it this way. If this wasn’t the best way of doing things I’m sure it would have disappeared by now. And I just thought, well first of all, if you can’t explain from your own business to me why you’ve organised this process in this way, look, then there must be something wrong.
And it’s also simply because it’s not true. Just the fact that you’ve always done it this way or that pretty much everybody does it this way in your industry does not mean it’s a good habit.
That’s also because circumstances change. Maybe you started this practice at a very particular point in time for all the right reasons, but then the organisation just carried on doing it the same way. And often, indeed, different companies in the same industry do things in the same way. And that is also just human nature and the nature of organisations. We pass things on to the next generation. And then we start calling it best practices.
But for many processes, in my research I found out that it may not be that it is still the best way of doing things. Once business circumstances have changed there may be better ways of doing things, even though people may be slow to recognize that. And I thought that was worth writing a book about. Also because I have done some good research on this, practices in the IVF industry for instance, or in the newspaper industry here in the UK, and so on. So lots of practical examples as I also discuss in the book.
How I decided upon a partnership with the Harvard Business Review Press, well certainly they also decided on a partnership with me. I wasn’t the only decision maker here! But indeed we hooked up. And for me actually I have to admit it was a fairly easy choice because the Harvard Business Review Press really is by far the most prestigious and prominent business book publisher in the industry.
It’s also because Harvard Business Review Press likes publishing books that are based on rigorous research, but very much focused on making the insights accessible for practicing managers. And that’s exactly what I wanted to do. They also really have very good editors that understand this.
Moreover, the Harvard Business Review Press – as they told me straight away – doesn’t publish books; they publish authors. Which means that they engage with authors through other media as well; I also write for the Harvard Business Review magazine, for their online platform, speak at some of their events, and so on. This is not something that other publishers can offer, at least not with such breadth and depth. So it’s a full-on partnership.
Kurt Manwaring: What is the concept of strategic imitation and what factors lead companies to imitate others before validating the efficacy of what they seek to imitate?
Freek Vermuelen: Well, strategic imitation is nothing else than, well, let’s look around us and do what others are doing, when we’re not quite sure what the best choices are. In fact we sometimes formalise this very process, we call it benchmarking. If we’re not quite sure what to do then we say, oh, let’s do some benchmarking and then we look at the top ten competitors in the industry or so. And if eight or nine out of ten have made a particular choice we say, well, then that must be best practice, let’s do it too.
Firms really engage in strategic imitation because of uncertainty. For example, we say, gosh, we see all big IT companies acquiring management consulting companies or vice versa, because everybody is saying IT is becoming strategic. And then we say, well, if everybody’s doing this in our industry we better do it too because not everybody can be wrong.
And therefore it’s just doing what others are doing out of sheer uncertainty; uncertainty is we’re not sure what the best choice is and what the future will look like. Is it a good idea to merge with an IT company? Is it a good idea to enter the Chinese market? Is it a good idea to adopt this new process management system that everybody’s talking about? We don’t know because we don’t know the future and very often these strategic choices only bear out in the long term. So we seek safety in numbers: we do what others are doing.
I have to say, there’s also some rational element to that for individual managers, because if you enter the Chinese market while everybody’s doing it, and then the Chinese market five/ten years later turns out to be a disaster, well nobody will blame you because they will say, well everybody got it wrong. He or she couldn’t possibly have known.
However, by contrast, if all your competitors enter the Chinese market but you stay behind because you have correctly assessed that there is an eighty percent chance that it is a bad idea, but by some sheer chance it does turn out to be an attractive market some years later, then everybody will say, well, he’s an idiot, he missed the boat; he thought he knew better. While everybody was going there, he’s the only one who thought he knew better and he didn’t go. And your board of directors will probably fire you, your employees will smirk at you and your competitors and customers alike.
So you will get punished because you’re the odd one out. And in that sense there is indeed some safety in numbers, which makes it very tempting to just do what others are doing. It’s of course also human nature. We are social animals and we imitate each other’s behaviour, in the way we dress and the langue we use and the music we prefer, whatever. And that also results in imitative behaviour when it comes to strategic choices.
Kurt Manwaring: Harmful practices spread quicker than they kill. Could you expand on what this means and provide an example? Why do bad practices persist?
Freek Vermeulen: Yes, so bad practices or harmful practices, we usually assume that they will automatically disappear over time. Remember the senior executive that I mentioned earlier who told me, “Freek, look around you, everybody does it this way and everybody has always been doing it this way”; I’m sure if this wasn’t the best way of doing things it would have disappeared by now. Well, he was wrong, although it’s not immediately clear why, because we usually say the market is efficient, competition makes that inefficient firms disappear. And if inefficient firms shrink and disappear because they go bankrupt, well their inefficient practices will die with them.
However, the last step, unfortunately, isn’t necessarily true. If inefficient firms die it doesn’t mean their inefficient practices die too. And the intuition of why that is you could understand by looking at nature, namely at viruses.
Viruses, say the HIV virus or the flu, they’re harmful for us, they’re harmful for the host of the virus, and they reduce their life expectancy. However, that doesn’t mean that the virus dies out, because although if you have HIV your life expectancy may be lower, the virus spreads quicker than it kills. It kills slowly but it spreads relatively quickly.
And the same is actually more or less true for harmful management practices. Very often, although they put the firm at a competitive disadvantage without it realising it, they’re easy to imitate. We may even call them best practices, which is why they spread easily, although, unknowingly, in the long term, they’re harmful. And indeed that’s one of the things that I discuss in the book.
So that’s the thing to remember. Just because everybody’s doing it this way and has always been doing it this way, that does not mean it is still the best way of doing things. And that is because the practice could be operating like a virus.
In my book and in some of my academic work I discuss a very explicit example indeed, or actually various explicit examples. But one of them comes from my own academic research on a practice in the IVF industry in the United Kingdom: in-vitro fertilisation; fertility clinics. A practice came about here that clinics started to select easy patients only. And that’s because treating only easy patients boosts your success rate. They’re easy to get pregnant so a large percentage of your treatments results in a success.
And that has all sorts of advantages. It pushes you up in the industry’s league table. It makes you look good, you may be able to attract new customers, and so on. However, when I measured the long-term consequences of this practice, together with a colleague, Mihaela Stan, it turned out that it was definitely a harmful practice. And that’s because, in a nutshell, these organisations learn a lot from their difficult patients.
And doing only easy patients deprives you of these valuable learning opportunities. However, these harmful facts only appeared in the long term. Exactly like a virus. However, the practice was also very easy to imitate: it’s pretty simple to select out difficult patients, there are standard tests for that, you just look at their age and so on. Therefore it was a practice that’s very easy to imitate, where the harmful effects only appeared in the long term, and the practice just continued to spread, just like a virus. And it still persist, just like the HIV virus persists until this day.
And most industries have practices like that. They may have come into existence as bad practices – as in the case of selection in the IVF industry – but some of them also started out as good practices but because the industry changed they, inadvertently, became bad ones.
Kurt Manwaring: What do most people in business misunderstand about best practices?
Freek Vermeulen: Well, several things, I would say. The first thing is that they’re not necessarily best anymore. Best practices doesn’t mean much more than, well, everybody does it this way. Or it means we’ve always been doing it this way. And therefore we call it best practices. However, it doesn’t necessarily have to be best or still best. It could be that ten years ago this was a good practice, but now circumstances have changed.
The second thing I would say, it could also be that in a different part of the industry, or for a different customer group it is a good practice. But that doesn’t mean it’s the best practice for you. Even if you think it’s best practice you still have to be able to understand and explain, if alone to yourself, why for you this is indeed also the best way of doing things. You can’t just imitate others without understanding why this is really the best way of doing things. So the first thing is that best isn’t always still best, and the second one is that you really have to understand it before you can conclude that it is also best for you.
I would say the third thing is that sometimes I’ve seen that the most successful innovations in particular industries have come from companies that explicitly challenged best practices and said, we’re going to do it differently.
For example, in my book I describe at some length a case on CitizenM Hotels, a very fast growing and popular new hotel chain that was voted trendiest hotel in the world on Trip Advisor two years in a row. And the starting point for this new hotel chain was really explicitly that we’re going to do things differently in the industry in terms of the facilities that we offer, in terms of how we build the hotels, in terms of how we sell the rooms. And that became a big success.
I’ve also written an elaborate case study on a bank called Capitec which is a South African consumer bank, ranked the past two years by Lafferty Group as the best bank in the world. And Capitec also explicitly started out saying we’re going to do things differently. Some of the things that people take for granted in consumer banking, as that’s the way you do it, we’re going to do it differently.
For example, they gave everybody the same account, rather than having different types of accounts and cards. For instance, they challenged the traditional opening hours; where it was best practice in South Africa that banks would close at 4:00, they said we’re going to change that. It was best practice in the industry that on a transaction you charged a fee that was a percentage of the transactions. And they said, we’re going to do that differently. We’re going to charge a fixed amount, and so on. They chose challenging best practices explicitly as the starting point for their new strategy and business model and were very successful doing that. It turned out that many of these best practices weren’t always so good after all.
So I would say what do most people misunderstand about best practices? Well one, it doesn’t mean they’re always going to be best practice, and that it’s the best practice in all parts of the industry. Second, that you still need to think for yourself. And understand why this practice is best for you. And third, that sometimes the most successful innovations come from explicitly challenging best practices.
Kurt Manwaring: When did it become a best practice for companies to have best practices?
Freek Vermeulen: Although I understand what you mean with this question, the honest answer is, I don’t know. But you’re certainly right. Just by calling it best practice it has sort of become best practice itself: you should do what others in the industry are doing, particularly the more successful companies. And sometimes putting the term on it like that actually reinforces it.
And we have good research in academia on management fashions or management fads, and they are often coupled with a particular word or concept, such as quality circles, empowerment, or management by objectives, and in a sense best practices may be one too. At least it seems fashionable to say we follow best practices. Having said that, the notion that firms imitate each other and do what others are doing, or that they simply repeat how they did things in the past, that has been around for ages. And I would say that that will continue for ages to come as well, because it’s a fundamental aspect of organisations and of human nature: we imitate others.
By the way, that’s not necessarily bad, because it also means that we don’t have to reinvent the wheel all the time. We can just do what worked in the past or do what others are doing. But it is also risky because we can get stuck in it even when environments change.
So it’s a very fundamental aspect about human nature and about organisational life. One that has been around for a long time and one that will still be around for a long time, undoubtedly. You also have to understand that best practices obviously can never give you a competitive advantage, because if everybody’s doing it, then everybody is the same.
Kurt Manwaring: How has your research on best/harmful practices been received? Does reception differ based on the audience, for instance academics, business leaders, et cetera? Could you share an example of someone who was noticeably enlightened when they learnt the concepts you are trying to teach?
Freek Vermeulen: Well let me start with business leaders because indeed I quite often speak directly to business leaders, for instance when I give keynotes at a conference, which can be an internal company conference or an open company conference. And quite often I speak about harmful practices and how come that they come into existence and do not necessarily disappear. And frankly, I seldom do not see someone who’s noticeably enlightened.
And let me explain. I just give them examples from harmful practices and other businesses and why they don’t die out, and explain that to them, and I can always see in people’s eyes that they have candidates in mind in their own organisation of what they think is an outdated practice. To give an example that I often use, although it’s a fairly extreme example, but therefore it makes it pretty clear, is that of newspapers.
So newspapers, say ten/fifteen years ago, were big; were big sheets of paper. And that was true in the entire industry, in all countries. And I was just curious why, because it seemed impractical, it’s actually pretty expensive these big sheets of paper. And after quite a bit of a search I just found out that these big sheets of papers that newspapers are printed on, that practice came about a very, very long time ago. Namely in the year 1712, in England.
And that was because the then English government started taxing newspaper companies based on the number of pages that they printed. As a result of which newspaper companies said, well, we’ll just print very few pages, make them as big as possible. This tax law was abolished in 1835 but by then everybody had forgotten why they had started that practice in the first place. And newspapers just continued printing their newspapers on huge sheets of paper.
Now since ten/fifteen years we know that customers actually prefer small sheets of paper because when finally, finally a newspaper took the plunge, the Independent in the UK, and printed a small newspaper, that smaller format very rapidly became very popular. And an extreme example like that makes it clear that sometimes best practices are just outdated practices. They may have come about at a particular point in time for very good reasons but then when gradually the industry changes or the company changes we forgot why we started it and we just continue doing things this way.
And the simple sentence, well that’s just the way we’ve always done it, is something that rings a bell in pretty much any organisation. I see in their eyes that they often have examples in mind. Very often I get approached after a keynote speech by someone who says, oh, I have another example for you in my own company and industry.
And sometimes when I have time enough I ask people in the audience for a few candidates, what could be harmful practices. And that is a thing in itself, what could be candidates. Because for harmful practices it’s usually very difficult to find evidence beforehand that it really is a bad practice. That’s because everybody’s been doing it this way. And therefore you can’t go much further than harbouring suspicions. But people immediately have a lot of suspicions about some of their own practices; they have candidates in mind of what could be harmful practices.
That also explains a bit why at certain times it’s so tricky to get rid of them, because most of the times you don’t have certainty beforehand that it’s a bad practice. The Independent also didn’t know with certainty beforehand that the small sheet newspaper would be so popular with customers. It was just an experiment. And they took the plunge, they took the risk, and then they learnt that indeed this had been an outdated and harmful practice, these big sheets of paper.
So it immediately tells you also why it’s so difficult sometimes to get rid of them. But as said, business leaders quite invariably have candidates in mind and recognise it from their own organisations. Some of the things we do we may just be doing it because they worked in the past and nobody quite remembers why we started it this way, and we just continue doing things the same way.
Academics, I should say, like it, the concept and the theory, and I have a quantitative model and so on, which they are fond of too, and various empirical research projects to support it. They like it for slightly different reasons, though. In academia, in much of the research on strategies and practices, we have been applying evolutionary theory: Darwinian selection mechanisms. And indeed if you apply them in a straightforward way you would think that inefficient firms decline and fail, and as I said before, their inefficient and harmful practices will die with them.
We say, well, that’s the root of capitalism: Competition automatically makes things better over time because better firms with better practices will flourish. And my theory and this model – which in the academic literature I refer to as inheritance theory – show that that’s not necessarily the case. And the key reason, again, is because practices take on a life of their own. They have life expectancies of their own. They operate like viruses. And viruses do not necessarily only benefit the host. Viruses depend somewhat on the survival of the host, but it’s not a one on one relationship. Viruses can also survive, although the individuals infected by them might gradually die out. And that is a new insight also in academic research.
If I go back to business leaders for a moment, I have to admit that not everybody always immediately agrees, and sometimes people have fairly strong reactions against it.
To give an example from someone else’s research, namely Professor Mary Benner who was at the Wharton School at the time, and Mike Tushman from the Harvard Business School, they did research on process management systems, particularly ISO 9000. And they showed that although ISO 9000 can be perfectly sensible and efficient in the short term it is also harmful for long term innovation. Which is fine if your company and your strategy is not about innovation, but if you want to be innovative, in the long run these process management systems can actually harm this.
And that’s, by the way, because they standardise a lot of things. And they basically quite literally stimulate, if not force, people to use best practice and not experiment with other ways of doing things, at least not in a radical way. And just the sheer insight that ISO 9000 can be harmful for innovation in the long term, some people find difficult to accept because they’ve built their careers around process management systems and ISO 9000 and quality control and reducing error rates and so on.
And sometime it’s then difficult to accept that some of the practices, the best practices, that we’ve always been doing this way and that we’ve been convinced are the best way of doing things, may actually be harmful in the long term. So not everybody is immediately receptive to the idea, particularly if it concerns their own practices.
Kurt Manwaring: If you could go back in time and observe all of the conversations behind any key business decision, what would you want to observe and why?
Freek Vermeulen: That’s obviously an interesting question. Here is what I would like to observe which might be slightly different from how you intended it: I would love to observe the conversations after a key business decision really has been made, because many of the conversations we have, many of the discussions about strategic decisions and rationales and PowerPoints and business plans and Excel sheets and so on, we actually make after we’ve pretty much made the decision.
I’ve seen that in my own advisory work and I’ve seen it certainly on other occasions as well when, for instance, a decision has been made that we’re going to merge with a particular company. A decision has been made that we are going to enter the Chinese market, for example. And a decision has been made that we’re going to launch a particular product or whatever. And after that we have a lot of meetings, with division heads, often with management consultants, where we say, let’s look at the rationale of the decision. We do due diligence, we compute the value of the company or the prospective market revenues and we make spreadsheets and PowerPoints and we convince each other, yes, this really is a good idea.
But very often these conversations happen really after the decision has already been made. And they, I’m sure, serve some sort of a function. They serve some function that we say, we’re all in it together. There’s always uncertainty about a business decision so we feel a bit more assured. Perhaps people are a bit more motivated or whatever it is. But much of the so-called decision making processes happen after a decision has been made. And not seldom that decision has been made on gut feeling, and we know from research that gut feeling unfortunately can often be wrong, or the decision has simply been made because, indeed, others have been doing it, and it appears to be best practice. Therefore we think we really ought to do it too.
And then looking at all the numbers, collecting all the information and the data, is just there to support this decision that really has already been made. And I have certainly always found that a rather fascinating process in organisational life. Maybe it will turn out to be a new book!