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The Flipside of Business Books

While writing business books, authors tend to look only at successful companies and not the ones which might have failed doing the same things

There is a certain formula to writing a business book which explains the reasons behind the success of a particular company and the learning other ‘lesser mortals’ can draw from it. It involves the authors choosing examples of companies that have been successful over a period of time, studying them in great detail and then explaining the reasons behind their success.

These reasons then become the ‘list of things to do’ for other managers and business leaders looking to build successful companies. The trouble is that companies that are studied as bellwethers of success often become very mediocre after the book has been published. There are four major problems with this approach of trying to figure out what makes a company successful. The first problem is what is referred to as survivorship bias. The authors studying success only look at companies which have been successful and not at the companies which might have failed doing the same things that successful companies did.

Take the case of the VHS versus Betamax battle for the video standard, between Sony and Matsushita, both Japanese companies. Sony decided to concentrate on video quality whereas Matsushita decided to concentrate on longer recording time, which ultimately became the key differentiator between the two standards.

So was Sony wrong in concentrating on quality of the video rather than the playing time? Not at all. This was totally in line with Sony’s positioning as a company which makes high end quality products. Even though Sony failed in this case by doing what it thought was the right thing to do, there are many companies which have become iconic by concentrating on the quality of the product rather than its price or other features.

The second problem is that authors are looking at something that has already happened and trying to fit a story around it. As Phil Rosenzweig writes in The Halo Effect...and the Eight Other Business Delusions that Deceive Managers, “We want explanations. We want the world around us to make sense... We prefer explanations that are definitive and offer clear implications.”

These explanations create an illusion that success in the world of business is orderly and predictable. As Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow, “The illusion that one has understood the past feeds the further illusion that one can predict and control the future. These illusions are comforting. They reduce the anxiety that we would experience if we allowed ourselves to fully acknowledge uncertainties of existence... Many business books are tailor-made to satisfy this need.” Among the many definitive explanations for success that have been offered, one of the most popular is that a company should stick to its core and do what it does best. But then there are examples of many other companies which do really well by looking beyond their core. “During the 1980s, General Electric, America’s largest industrial company associated with light bulbs, refrigerators, airplane engines, and plastics, sold some of its traditional businesses -- home appliances and television and went in a big way into financial services,” writes Rosenzweig. And GE did very well in its new business. So going beyond its core helped GE to reinvent itself even though a lot of business books recommended doing exactly the opposite.

The third problem with the way authors approach business books is that they never really take into account the element of luck. Tonnes of books have been written about around the success of Google, one of the most innovative companies of our times. But almost none of them really talk about the early streak of luck that Google had. As Duncan J Watts writes in Everything is Obvious -- Once You Know the Answer, “In the late 1990s the founders of Google, Sergey Brin and Larry Page, tried to sell their company for $1.6 million.” The story goes that the buyer thought that Brin and Page were asking for too high a price and decided not to go ahead with the deal.

Microsoft had a similar lucky streak. The story goes that when IBM first approached Bill Gates to supply an operating system for IBM’s new PC, Gates referred them to this guy called Gary Kildall, who ran a company called Digital Research. Kildall and IBM couldn’t strike a deal, and so IBM went back to Gates. And this changed the game totally for Gates.

As Michael Mauboussin writes in The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, “IBM struck a deal with Gates for a look-alike of Kildall’s product, CP/M-86, that Gates had acquired. Once it was tweaked for the IBM PC, Microsoft renamed it PC-DOS and shipped it. After some wrangling by Kildall, IBM did agree to ship CP/M-86 as an alternative operating system. IBM also set the prices for products. No operating system was included with the IBM PC, and everyone who bought a PC had to purchase an operating system. PC-DOS cost $40. CP/M-86 cost $240. Guess which won.”

What really got Microsoft and Gates going was the fact that Gates had kept the right to license PC-DOS to other companies. And when other companies started manufacturing PCs, Gates was there selling them his operating system. “The fact is, Kildall played his cards much differently than Gates did, and hence, did well but enjoyed financial success vastly more modest than Gates. But it’s tantalising to consider the possibility that with a few tweaks, Kildall could have been Gates,” writes Mauboussin.

The fourth problem with most management books is that they overestimate the role of a CEO in the success of companies. While there is no denying that CEOs do influence performance of companies, but their impact is much lower than most business books tend to suggest.

As Kahneman points out “A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as 0.3, indicating a 30 per cent overlap.” Also the books never take into account whether business leaders are taking on too much risk. “A few lucky gambles can crown a reckless leader with a halo of prescience and boldness,” writes Kahneman. The trouble is if the authors don’t make heroes out of CEOs their books won’t sell. “It is difficult to imagine people lining up at airport bookstores to buy a book that enthusiastically describes the practises of business leaders who, on average, do somewhat better than chance. Consumers have a hunger for a clear message about the determinants of success and failure in business, and they need stories that offer a sense of understanding, however illusory,” writes Kahneman.

And that’s the story of business books. There are no magic formulas as the books try to tell us over and over again. As Rosenzweig best puts it, “There’s no magic formula, no way to crack the code, no genie in the bottle holding the secrets to success. The answer to the question, what really works? Is simple: Nothing really works, at least not all the time.”