Individual Bias – Who cares? It’s Science.

Let me begin by acknowledging that the scientific process is far from perfect. It often heads off in wrong directions for extended periods, operates in fits and starts and isn’t cheap. Yet, science is to the discovery of knowledge what democracy is to the governance of society (Churchill’s dictum: the worst form, except for all the others that have been tried). Presumably, the “biases” Freek and Steve are talking about have been with us since Galileo. Yet, science advances all the same.

I put the word “biases” in scare quotes because I’m wondering how one would distinguish the scenario Freek identifies from one containing objective researchers with strong priors. Objective researchers are allowed to have strong priors, especially those who are experts in a field.

Still, suppose we stipulate that researchers’ emotions or preferences often lead them to hold dogmatic beliefs with respect to some favored, yet false, views (i.e., they completely ignore new, contradictory information). If the following conditions hold, then a field that follows the scientific method will eventually discard the false views: 1) not everyone in the field believes the false view; and, 2) it is possible to collect facts that refute the false views.

The reason for this is that scientific institutions provide enormous incentives to the “young Turks” of a field to overturn conventional wisdom. It’s true that there is also strong pressure on young scientists to conform to the CW. And one may well be able to enjoy a quiet career as a scientist by going whichever way the wind blows. But, you’ll never get famous that way. The history of science is loaded with examples of now famous scientists who are famous exactly because they broke with the CW. 

Nor do I agree with Steve that some form of external refereeing is necessary for the system to work. True, it might take a generation for the up-and-comers to pry the CW from the cold, dead fingers of their senior colleagues but, eventually, that does happen. No external audience is required.

The problem with strategy (and most areas of social science) is that many of the objects in our theories are difficult, if not impossible, to measure. When this is true, the scientific process breaks down because item (2) above does not come in to play. So, for example, we have a theory known as “Porter’s 5 Forces” being taught without refinement from its original form for over 30 years. Indeed, in strategy, scholars are able to stake out a wide variety of sloppily constructed, ambiguous, and logically suspect theories for extended periods precisely because the lack of key data make them impossible to refute. 

In the Mail

Start with Why, by Simon Sinek Came across this TED presentation by Simon Sinek. Normally, I skip the practitioner-oriented stuff, but this sounded sufficiently coherent and interesting to cause me to buy the book.

Let’s face it: in most industries, firms pretty much do the same thing

In the field of strategy, we always make a big thing out of differentiation: we tell firms that they have to do something different in the market place, and offer customers a unique value proposition. Ideas around product differentiation, value innovation, and whole Blue Oceans are devoted to it. But we also can’t deny that in many industries – if not most industries – firms more or less do the same thing.

Whether you take supermarkets, investment banks, airlines, or auditors, what you get as a customer is highly similar across firms. 

1. Ability to execute: What may be the case, is that despite doing pretty much the same thing, following the same strategy, there can be substantial differences between the firms in terms of their profitability. The reason can lie in execution: some firms have obtained capabilities that enable them to implement and hence profit from the strategy better than others. For example, Sainsbury’s supermarkets really aren’t all that different from Tesco’s, offering the same products at pretty much the same price in pretty much the same shape and fashion in highly identical shops with similarly tempting routes and a till at the end. But for many years, Tesco had a superior ability to organise the logistics and processes behind their supermarkets, raking up substantially higher profits in the process.
2. Shake-out: As a consequence of such capability differences – although it can be a surprisingly slow process – due to their homogeneous goods, we may see firms start to compete on price, margins decline to zero, and the least efficient firms are pushed out of the market. And one can hear a sigh of relief amongst economists: “our theory works” (not that we particularly care about the world of practice, let alone be inclined to adapt our theory to it, but it is more comforting this way).
3. A surprisingly common anomaly? But it also can’t be denied that there are industries in which firms offer pretty much the same thing, have highly similar capabilities, are not any different in their execution, and still maintain ridiculously high margins for a sustained period of time. And why is that? For example, as a customer, when you hire one of the Big Four accounting firms (PwC, Ernst & Young, KPMG, Deloitte), you really get the same stuff. They are organised pretty much the same way, they have the same type of people and cultures, and have highly similar processes in place. Yet, they also (still) make buckets of money, repeatedly turning and churning their partners into millionaires.

“But such markets shouldn’t exist!” we might cry out in despair. But they do. Even the Big Four themselves will admit – be it only in covert private conversations carefully shielding their mouths with their hands – that they are really not that different. And quite a few industries are like that. Is it a conspiracy, illegal collusion, or a business X file?

None of the above I am sure, or perhaps a bit of all of them… For one, industry norms seem to play a big role in much of it: unwritten (sometimes even unconscious), collective moral codes, sometimes even crossing the globe, in terms of how to behave and what to do when you want to be in this profession. Which includes the minimum margin to make on a surprisingly undifferentiated service.