Tuesday, May 10, 2016

Corporate Strategy Conformism

One of the frustrating aspects of corporate behavior is the tendency for a large portion of the enterprise population to chose the most common rather than the most profitable strategy. The natural assumption is that the market interaction, amongst humans and between corporate entities, is driven by the desire to achieve straightforward payoff maximisation. It is not just an assumption; it is often a contractual obligation that management should first and foremost consider the interests of shareholders in its business actions. 

As a result, conformists’ strategy behavior within a corporation’s executive seems to be a contrarian to the requirement of the strategic decision making process. These comportements seem to be widely spread within the corporate world. Every year, we see a new fade coming and spreading like wildfire, bi-modal from Gartner, we need a platform, etc.. 

This generated quite a lot of frustration from me as I was trying to understand why such behavior was commonplace. I wasn’t fully satisfied by herding instincts or widespread incompetence justification that were so often put forward. This just didn’t add up because in a competitive system, under-performing strategies should have been eradicated a long time ago due to evolutionary constraints, and yet instead the conformist strategy persisted.

Behavioral conformity :

Recently I came across a series of Game Theory papers [ 1 - 2 - 3 - 4 ] that provide the beginning of an answer . This research indicated that spatial selection for cooperation is enhanced if an appropriate fraction of the population chooses the most common rather than the profitable strategy within interaction range. 

One of the premises of this research relies on the aspect that humans are social animals that are not solely driven by the desire to maximise fitness, but also aim to socialize and identify oneself within a group of like minded individuals. The main idea is that some of the individuals participating in a competitive game do not adopt the strategy that is the most profitable but instead, the strategy that is the most common in the group or within one's interaction range. Another interesting side effect of this behavior is that the individual and group benefits from the strategic approach homogeneity, which can explain why this behavior persist in the face of more individualistic corporation. 

As executives in a corporation are still humans (until proven otherwise), we can assume that these behaviors are transposed, to a certain extend, to their strategy decision making process by incorporating conformity as an alternative to straightforward payoff maximisation in cooperation strategy. We can begin to have a valid explanation as to copycat behavior of management. Naturally, not all participants are conformists, but they all have this tendency to become such, to a certain degree.

Within a network of enterprises doing business and competing against each other, you end up having different participants with various degrees of conformism tendencies. And the repartition and diversity ultimately has an impact on the ecosystem landscape. However, the amount of information available for the strategic decision making choices greatly influences the conformity tendency and this is often abused by consulting and analyst companies. 

Conformity by Information overload :

It has been demonstrated that conformist tendencies for choosing a particular strategy is reinforced with the increase of available information. And that is why consulting and analyst companies are able to hook-in so many corporations with a similar pitch. When overwhelmed with information, humans tend to turn to a third party to make the decision for them. 

This approach is well known and applied in retail. For example, as soon as you step into a mobile phone shop, you are assailed by a multitude of phones to chose from. As the customer starts to feel disoriented by this tsunami of choice, the “helpful” shop assistant quickly step in to advise you. At this stage, customers are more than happy to be led to the “ideal” phone they need. 

Following a similar scenario in the corporate world, management often relinquish their strategic decision power after being bombarded with information. This onslaught, being orchestrated by the same businesses that will sell them the strategy they “need”. 

Luckily for advisors and the advised corporation, conformist behavior delivers some non negligible benefits. 

Benefits of conformism :

What is interesting is that the research [ 5 - 6 ] show that the adoption of strategy is most common within the interaction range of the player regardless of the expected payoff. While you would expect this to be detrimental, it has been shown that the participant adopting the conformist approach, coordinates their behavior in a way that minimizes individual risk and ensures that their payoff will not be much lower than average.
Moreover, the effect of conformism in game theory is similar to the one we witness in the business world. This behavior fosters the emergence of large homogeneous clusters competing with each other in the same ecosystem. The participants in these groups benefit from the cooperation by virtue of the network reciprocity. And from this network reciprocity effect, they benefit from a minimization of invasion risks by defectors.
As a result, while you do not get the chance to greatly outperform the market, you are still providing a better than average return, while benefiting from a group protection. These types of results are generally regarded as positive by company boards and hence conformist behavior is rarely questioned, but usually encouraged (but not always consciously).

Leveraging conformism situational awareness

The great thing about conformist behavior, is that once you have learned to spot it within the business ecosystem, you can leverage it to your advantage. By drawing a map of a business’ ecosystem, you can identify its’ participants, strategic approach and spot homogeneous clusters competing in the population.

Armed with this information you can identify weak clusters to disrupt. Weak clusters are often characterized by the presence of conformist leaders. Leaders are corporations with a high collective influence in the network. If leaders conform, they lose the capability to capitalise on their central position within the network by forfeiting their capacity to search for a more successful strategy. This means that the business within the cluster will suffer from a form of sclerosis and won’t be able to coordinate and/or formulate a counter strategy when challenged. As a result, individual corporations in the cluster are more vulnerable as the network effect dwindles.

Another way to leverage conformism at your advantage is to spot companies that copy neighboring strategies, when the neighbor’s business belongs to a different evolutionary stage. Imagine that Company A is selling utility components and use a platform strategy. Company B uses Company A’s product but sells custom components. If Company B decides to mimic Company A’s platform play, you then have the opportunity to to out-compete Company B by industrializing Company B’s components.

Conformism or Anti-conformism ?

The conformist approach can be a valid choice as it creates non negligible benefits. However, this needs to be an informed choice, not a contrived one. Corporations need to understand the state of the playing field and decide whether or not leveraging the cluster effect might benefit them or hinder them. Moreover, by understanding how network cooperation effects are detrimental to them, companies can tailor their own strategy to take advantage of the conformist tendencies of their surroundings. In the end it boils down to understanding the surrounding corporate environment and to know when to blend in or not.