KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to speak to Freek Vermeulen, who is [an associate professor of strategy and entrepreneurship] at the London Business School.
Freek, you have been looking at strategy and it has some unexpected consequences in the long term. What is your thinking on this?
FREEK VERMEULEN – Yes Karl, exactly. Much of my work looks at the unexpected consequences of certain strategies and management practices, and that is because many of these practices and strategies have consequences which are different from the short-term consequences, but because managers observe short-term consequences, that's what they may base their decisions on.
Even when the consequences materialize in the long-run, and they can for instance be harmful, managers still have difficulty adapting their strategies. And that's not because they don't experience the consequences, they do, but because they have difficulty tying together cause and effect, and understanding what is leading to these harmful consequences.
In fact, let me give an example from my own research. Together with a colleague, Mihaela Stan, I have been doing research on fertility clinics in the United Kingdom. Fertility clinics, of course, have to publish their success rates. In fact, in the U.K., that is required by the government. The success rate is then very objective, and that is why I studied that industry – namely, percentage of treatments that results in a pregnancy.
Now, the problem with that, though, is that the success rate of you as a clinic not only depends on how good you are, but also on who comes through the door. Some patients are more easy to treat, and in this case get pregnant, than others. So what these clinics have started doing is selecting their patients. Sometimes they are not very eager to take on difficult patients because they know that will lower their success rates. So some clinics only select easy patients and therefore have a higher success rate and that is a practice that has been spreading in this industry.
Now, what me and my colleague then did is we, of course, measured the success rate and the proportion of difficult patients that each clinic treated and indeed, of course, if you treat easier patients you will have a higher success rate. But – and this is what people in this industry did not realize and see – we also measured the long-term consequences in the form of really estimating what we call a learning curve; and all organizations and clinics become better over time.
We found out that those clinics that treat a lot of difficult patients improve very quickly over time and improve much more than clinics that only do easy patients. Meaning that, after just a few years, the clinics that do a lot of difficult patients actually perform better than the clinics that do easy patients. So those clinics that think they are doing a clever thing and only doing easy patients basically shoot themselves in the foot.
But the point is these managers make decisions based on the short-term consequences of their actions, namely, if we do easier patients our success rates will go up, and they don't necessarily see those long-term consequences.
KARL MOORE – So how does a manager foresee the long-term consequences? Because they are long-term.
FREEK VERMEULEN – In fact, that is exactly the difficulty with these types of problems.
The first thing is we see the short-term consequences of our actions; we do easier patients and our success rate goes up, and therefore on that information is what we base our decisions on.
In fact we do see, or we feel, the long-term consequences because a few years later we do see that our success rate is lagging behind. The real problem is tying together cause and effect and saying, "Ah, our success rates are lower than these other clinics. That's because five, six or seven years ago, we started to select only easy patients." So that's the main problem.
In fact, I see that as a bit of my mission and my goal and purpose in life as an academic researcher, is to actually expose those types of harmful long-term consequences. So the direct answer to your question, in this case, is pay attention to my research.