Often, when I’m asked to give a speech on strategy at some company event or conference, I find that one of the other speakers is a former professional sports player. In that capacity, I’ve happily attended the talks – with much interest – of a famous ice-hockey and a famous table tennis player, some rowers, and a freeskier; I’ve listened to the fascinating tales of a professional BASE jumper whose parachute failed, someone who walked to the North Pole unaided, an Olympic athlete, and a championship-winning golfer. Invariably, they offer tantalizing stories of commitment, perseverance, and the sweet joy of winning. (Some talks go even further, comparing business to war – I’ve accordingly witnessed rousing speeches on Lanchester strategy and from retired generals on how to overcome the enemy.)
The message for managers is clear: this is the way to outcompete your business rivals; these are the traits that will bring you and your company commercial victory. Although there is nothing wrong with commitment and perseverance, I, however, think sport (much less war) is often an unhelpful analogy. Good management is not like a competitive sport. And managing your company as if it is, can lead your business astray – or at least create a mighty corporate mess.
Why sports metaphors are damaging
Much of the reason that acting like business is a sport creates a bad firm is because of a phenomenon called time compression diseconomies. Time compression diseconomies were first noted by professors Ingemar Dierickx and Karel Cool. The theory describes, for example, how organizations may double their investments (in terms of money and management effort) but that does not mean they get something twice as much or twice as quickly. Dierickx and Cool illustrate the phenomenon aptly with a dialogue between an English lord and his American visitor:
“How come you got such a gorgeous lawn?” asks the American.
“Well, the quality of the soil, is, I dare say, of the utmost importance,” replies the lord.
“No problem.”
“Furthermore, one does need the finest quality seed and fertilizers.”
“Big deal.”
“Of course, daily watering and weekly mowing are jolly important.”
“No sweat, just leave it to me.”
“That’s it.”
“No kidding?! That’s it?!”
“Oh absolutely. There is nothing to it, old boy, just keep it up for five centuries.”
Building an organization and amassing a competitive advantage work much the same way. One can throw more resources at it, work harder, and whip others into expending more effort too, but the organizational elements that make up a working firm – which by themselves may not be rocket science – need to gradually blend together to grow into a well-functioning organization. This takes nurturing, care, and, simply, time. Prematurely piling more effort onto something that hasn’t blended yet can actually make it worse.
Business history is full of examples of companies that grew remarkably fast – often aided by acquisitions – and became the darlings of the stock market, only to collapse after a period of high growth and corresponding pressure. People then blame the downfalls of companies such as Valeant, Enron, Ahold, or WorldCom on hubris, mismanagement, and outright fraud but really these are just the symptoms of a problem rather than its cause. These firms had leaders that imagined themselves to be in a race that needed to be won. But that is not how organizations work.
Of course, in business there is rivalry and competition. Yet, focus too much on “beating the competition” and you will likely hurt your chances of succeeding.
A large statistical study I conducted some years ago compared the growth trajectories of 25 multinationals over their lifespans and found clear evidence of time compression diseconomies: smooth and steady expansion strategies gradually led to superior profitability. Firms that approached their growth as a race to be won, by expanding faster and further than others, eventually led themselves into dire straits. Not coincidentally, since the study’s completion, several of them have disappeared altogether.
A better, but admittedly less sexy, metaphor
A more useful comparison is that of a builder of communities, with investors, suppliers, partners and, most of all, your employees.
At the end of the day, organizations are collections of people; this means that superior organizations need more effective ways for them to cooperate and work toward a common goal. As the famous management professor Henry Mintzberg noted: “Think of the organizations you most admire. I’ll bet that front and center is a powerful sense of community.”
Research backs this up. Several studies have examined the characteristics of resources that, over time, lead to superior performance. The conclusion of this stream of research is that these resources are usually intangible and community based, such as relationships, trust, culture, identity, or knowledge sharing. That is because, ultimately, competitive advantage comes from people, rather than products or patents.
My corporate finance colleague Alex Edmans has also systematically examined the impact of intangible resources on firm performance. He looked at companies that made it onto the list of “100 Best Companies to Work For in America” as a proxy for its organizational culture and morale, and discovered that they subsequently significantly outperformed the market with more positive earnings surprises and announcement returns. The conclusion: Great organizational communities create great financial results.
Of course, there are ample firms that will valiantly proclaim that “our people are our greatest asset” and that “our employees are the key to our success.” However, we’ve all too often witnessed these intentions morph into “the war for talent” and the proclamation to “hire the best people fast” (as these telling examples of Yahoo and Netscape testify). Yet, building a community is something else than a race or a contest to hire “exceptionally talented” people.
A superior organization can be built on perfectly normal people, who closely collaborate and identify with each other. Southwest Airlines’ founder Herb Kelleher, for example, did not base his company’s competitive advantage on superior airplanes, landing slots, or booking systems; he also did not set out to hire the top graduates from the most prestigious universities; instead, he carefully fostered a strong identity within his company and an organizational culture of employee motivation and morale. Superior organizations bring business success; not superior people.
Granted, the analogy of successful sports teams can sometimes aid managers to reflect on how to build and manage their own teams. Comparing team-building in sports and in business may thus be a helpful exercise. As my organizational behavior colleague Dan Cable fairly observed to me, “There are ways in which the [sports team] analogy helps people: it can help us think about how successful teams set goals, overcome adversity, deal with disappointment. How they deal with performance, resilience and recovery time. And what it feels like to win.” But what is useful at the level of team dynamics is inappropriate and counterproductive at the company level.
If the sports (and war) analogies are so unhelpful to businesses, why do they remain so popular in corporate lingo? Perhaps the answer is simply that business leaders enjoy comparing themselves to sporting and war heroes and victorious athletes. There is something ego-boosting about it. And I can admit that building a community, to some, might not sound as sexy or awe-inspiring as winning a race or reaching a summit.
But that is too bad. It is exactly these kind of intangible resources that can form the basis of a sustainable competitive advantage; and fostering them is arguably even tougher than playing table tennis.
