How is it that top managers always fall into the same traps? Tunnel vision, herding instincts, quantitative myopia, and a litany of other shortcomings are the grist to professor Vermeulen’s mill of managerial shame.

Book data
Title: Business Exposed
Author: Freek Vermeulen
Pages:   238 pages
Publisher: FT Prentice Hall
Price: £14.99

Simplifying matters somewhat, one could distinguish between two classes of business and management books. At one end of the spectrum one finds books based on extensive academic research, often presenting novel theories or hypotheses. At the other end of the spectrum are books derived from hands-on experience, often penned by CEOs or management consultants.

For Freek* Vermeulen, author of “Business Exposed” (click here for bio), the urge to deliver a first book came from mounting unhappiness at reading what to him seemed fallacious arguments. So he presents us with an unusual book. It reads almost like a Woody Allen story (yes, there are some truly hilarious lines), yet in its structure it is like a scientific ‘review’ paper; in other words it offers frequent reference to erudite research from others. Its innovation lies not so much in primary original research as in the choice of topics to cover, and his extraordinary selection of anecdotes to underpin the conclusions.

In this first part of our three-part series on “Business Exposed”, we’ll look at some of the pokes that Freek makes at common management practices (click here for our interview with Freek), and then at some of the reasons why companies fall from success.

Diagnosis: many management ills
In his diagnosis of why we sometimes make for lousy managers, the author focuses on seven traits.

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Humans seem to have a natural instinct to want to follow. Freek quotes a community experiment in energy conservation, where the most effective stimulus was “my neighbors are also doing it”. Yet following is not always the best option.

We humans also display a tendency for collective inertia, and it often takes a market shock for companies to wake from their stupor. The case of British newspapers, and their shift from broadsheet formats to tabloid formats is the example Freek quotes here.

Conforming to consensus ideas is the third poke. Here, the author pulls out the Abilene paradox, wherein a Texas business school professor and his family embark on a long road trip to a hamburger joint that in fact none of them really wanted to visit. Company management can also fall victim to the Abilene paradox, when thinking that the unspoken consensus veers a certain direction, when in fact it sometimes does not.

Usually, company managers are not shy folks, yet because of the optimal distinctiveness theory they often do not want to stand out too much. Freek cites the CEO of the company that should have entered the Scandinavian market in Year 1 yet waited until Year 3, when his top competitor entered the market. Too scared to stick out one’s head and take a risk?

Turning from cognitive issues to quantitative ones, the author cites two further traits. Selection bias in choosing what data to analyze can have disastrous effects, as can over-reliance on numbers, namely in long-term strategic planning. For this dreaded plan, numbers can be pulled out of the air any which way.

The final management ill is the “framing contest” and its role in strategy. As a professor of strategic management, Freek gets his kicks out of peeking on how companies set their goals. He is a strong believer in serendipity in strategy. The impact of non-planned events and insights is crucial. Model train maker Hornby is an oft-quoted example, and how they shifted from the toy market (target: children) to the hobbyist market (target: lunatics). Southwest Airlines uncovered the low-cost model because they had no other choice when one of their aircraft was impounded for unpaid bills. Ditto for CNN and its international expansion, which can be traced to Fidel Castro’s strategic vision.

Success traps
Another item that has bothered the author is why good companies mostly stumble. In his review of relevant research, Freek’s sonar uncovers three intriguing phenomena.

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Let us start with the Icarus paradox. This is when a company soars so high on its success that this directly causes its downfall, just as the waxen wings of Greek myth Icarus melted when he flew too close to the sun. The particular danger here is that a company may become so good at one thing that modifications in its environment can have a deadly impact.

Next stumbling block is tunnel vision, namely when it afflicts the CEO and/or board. Freek points out that CEOs often suffer from a distorted perception of their business environment. Changes therein are interpreted as threats, whereas competitors perceive these same threats as opportunities… that might enable these lower-ranked companies to overtake the dominant leader.

The award for the prettiest metaphor goes to the creosote bush, that desert plant that poisons its immediate surroundings in order to survive. For the author, many successful companies suffer from the same syndrome: they are so successful at what they do that they no longer innovate properly…

The final success trap that the author evokes is that of what to do in economic downturns. His timely advice is to avoid focus on cost cutting (everyone’s knee-jerk reaction), and rather spend time on managing revenues. In particular developing new revenue streams should always be an executive’s priority. Freek quotes the example of a supplier to GM and Ford that gave impetus to its sales to their spare parts divisions when sales to the new vehicle divisions dropped.

However, dear reader, remember the author’s warning words (page xviii in the Foreword): “I am not going to tell you what to do. I am going to tell you how things work, in the strange business of business.”

* Does not rhyme with chic; difficult Dutch pronunciation, somewhat akin to “frake”.

By Chris Fodor, published January 2011.
Our next installment will appear on February 9 and will delve into Freek Vermeulen’s appreciation of CEOs.