KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University with Talking Management for The Globe and Mail. Today I am delighted to speak to Freek Vermeulen who is a professor at the London Business School.
You have looked at the idea that poor management practices can last a surprisingly long time. Why do you think that is?
FREEK VERMEULEN – Yes, that is certainly true – that is not just my belief but I think I have some evidence of that as well. I like to do research on it because it challenges a very basic assumption that many people have – academics, economists but even politicians. They have a firm belief in the market or so, that the markets will makes things better and weed out these harmful management practices. Actually, I am very convinced, and again I have been doing research on that, that's not actually the case and the market doesn't solve it all.
KARL MOORE – So why is that?
FREEK VERMEULEN – We assume that harmful management practices will make firms less competitive and because they are less competitive they will gradually disappear and those practices will disappear with them.
But unfortunately I have noticed that is not necessarily the case and let me give an example of that. I had already been wondering for a long time why, for instance, newspapers were always so big and are such impractically large sized newspapers and why newspaper companies wouldn't make them smaller. Now, I have always made the assumption that was because it was cheaper to print on big sheets of paper. But when I really started working with newspapers, among others The Guardian in the U.K., I found out that it is actually more expensive to print on big sheets of paper then on small ones. Then I asked them, "Why do you do it? Why impractically large sheets of paper instead of small ones? It's more practical!" And then they said to me, 'Yeah, but look, that's the way it is. Look around you, all newspapers are big and have always been big. Customers wouldn't want it any other way.'
Now, of course, we know since a few years that wasn't true because actually The Independent, as the very first newspaper in the world, made a smaller newspaper and it was because they were going bankrupt and they had to do something, and saw a surge in circulation. Then The Times followed and made the smaller newspaper and did better, and even The Guardian followed and now you see, all over the world, that newspapers are getting smaller. So, yes, the customers did want it.
So then I looked into where had this practice come from – these impractically large sheets of paper. I found out that is started at a very precise location at a very precise point in time, mainly the year 1712. In 1712, in London, the then English government decided to start taxing newspaper companies based on the number of pages they print. After which all these newspaper companies decided, 'you know what we will just make them as big as possible and print as few as possible.' Now, this tax law was abolished in 1830 but ever since newspaper companies kept printing on these incredibly large sheets of paper.
The point is that they kept doing this practice because everyone, indeed, was doing it and the assumption had grown that it is the way it had to be. If nobody challenges that assumption we won't find out that it's the wrong practice and it can actually persist, like in this case, for centuries and I am convinced potentially even longer.
KARL MOORE – So how do these sorts of anomalies get eventually solved in an industry?
FREEK VERMEULEN – Well in many industries, I am convinced, they often don't – at least not for a very long time. But if they do, and when they do, you can see certain things that you can generalize.
First of all, there is a role for entrants although it's actually very difficult for entrants not to conform to the roles of the industry, but sometimes you can learn a little bit from entrants. For example, in the U.K., you have got a free newspaper Metro, as you also have in other countries, which was a smaller sized newspaper. It was a very different newspaper, but it did make the other newspapers pay attention and say, 'hey, perhaps it is possible to have a newspaper which is smaller.'
The second one is that sometimes, and it's also paradoxically, it's actually companies in distress that manage to solve it – as we saw here with The Independent. The Independent namely had nothing to lose; it was going bankrupt, so they thought, 'We might as well try this.' Well once The Independent succeeded, you see that other firms gather a lot of information from that and then they start doing it as well. So sometimes you see that, paradoxically, it's companies in distress that solve these problems.
My recommendation for companies that are still doing fine is to therefore, paradoxically, not monitor other successful companies but monitor actually entrants and monitor failing companies because sometimes you can learn a lot from the experiments that they are running.