1436
n
Myths in management
Can we please stop saying that the market is
efficient?
Actually, the idea that management practices act like viruses
has potential implications for how we view the workings of our
whole economy, and the efciency of the market on which most
countries in the world base their economic model.
The famous economist Jovanovic wrote, about a quarter of a
century ago, “efcient rms grow and survive; inefcient rms
decline and fail”. What he meant is that the market is Darwinian; it
will rule out the least efcient rms, with habits and practices that
make them perform comparatively badly, and it will make sure
efcient rms prosper, so that only good business practices prevail.
Yeah, right.
When you look around you, in the world of business, one
sometimes can’t help wonder where Darwin went wrong . . .
How come we see so many rms that drive us up the wall, how
come we see silly business practices persisting (excessive risk-
taking, dubious governance mechanisms, corporate sexism, grey
suits and ties, to name an eclectic few), and how come so many
– sometimes well-educated and intelligent – people continue
to have an almost unshakable belief that the market really is
efcient, and that it will make the best rms prevail if you just
give it time?
That’s because the logic is not entirely wrong. The market is
Darwinian, and the rms with the highest level of “tness” are
the ones most likely to prevail. However, our Darwinian view of
business is also so simplistic that I am unsure whether it would
make Mister Charles Robert Darwin cringe, burst out laughing, or
pull the hairs from his bulging beard in agony. Darwinian mech-
anisms – or market mechanisms if you prefer – work at different
levels. And sometimes they conict. Let me explain.
Some business practices, like the ones mentioned above, will
actually reduce the tness levels of the rms that adopt them,
and make them less efcient, yet they persist. That’s because
Business Exposed144
these practices have a tness level of their own. The u kills
many thousands of people every year, and at rst glance it seems
a slightly awed strategy of the virus to kill one’s host, yet it
persists. Why is that? That’s because it spreads quicker than it
kills. It doesn’t matter much, for a virus, that it reduces the tness
of its host, as long as it jumps to someone else before the host
snuffs it! And in a way that is what bad business practices do too.
They spread easily, and kill slowly and stealthily.
Firms don’t know that the practice is bad. Very bad practices are
easy to spot, so nobody adopts them, but not these ones! They’re
sneaky – you catch it before you realize it, and the negative
effects only become apparent in the long run, just like the eating
habits of the Fore people.
An example, you say? Well, I explained earlier how downsizing
takes its toll, yet remains popular. Similarly, a few pages ago I
discussed scientic ndings on the consequences of adopting ISO
9000, especially when applied in a very innovative industry. The
research I discussed – by Professors Benner from the University
of Pennsylvania and Tushman from the Harvard Business School
– showed that ISO 9000, in the long run, can have a severe
negative impact on a rm because it hampers innovation. Yet,
the short-term benets are clear; adopting ISO 9000 often comes
with some good reputational effects, an immediate increase in
customers, and satised stakeholders. However, the negative
effect on innovation, in the long run, may outweigh all of this.
Nevertheless, rms adopt practices because they see the
short-term benets, but are quite unaware of the long-run
detrimental stuff. To managers in charge of improving their
rms’ performance now, the practice seems attractive because
they noticed that companies in other industries (perhaps not so
reliant on innovation) beneted greatly at the time they adopted
it, many of the rm’s competitors are currently adopting it, and
they all see a surge in customer applications too! Of course it
looks attractive!
Moreover, once we start to suffer from a shortage of internal
innovation, many years will have passed, and no-one quite
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.