Great Companies are “Discovered, not Planned”, Research Suggests

Facebook, Uber and Lyft. None of those companies do today what they did when they were founded.

In fact, new research conducted by the University of Chicago and the Stanford Graduate School of Business suggests that leaders assuming they can stick with their prevailing vision, or follow the herd, often end up getting trampled.

The results have implications for even the most established companies as they face a constant need to re-invent themselves to cope with digital disruption.

“It’s almost always the case that the greatest firms are discovered and not planned,” Stanford professor William P. Barnett said.

“ALTHOUGH NON-CONSENSUS BEHAVIOR MAY SEEM LIKE FOOLISHNESS AT THE TIME, IT TURNS OUT TO BE A WISE ALTERNATIVE.”

To test their theory, Barnett and University of Chicago associate professor Elizabeth G. Pontikes examined the success rates of software companies operating in 4,566 organizations over 12 years. They discovered that leaders willing to adapt their initial ideas to find the right market were more likely to source financing and go public.

Leaders who adopted a “herd mentality” and chased perceived hot markets fared more poorly than those who defied common wisdom and explored markets that were recently tainted by failure. Among more established companies, Apple is a case in point: Steve Jobs continued to explore opportunities in the handset market to great success, even after the embarrassing failure of Apple’s Newton device in the early 1990s.

The study found that consensus behavior was also common among venture capitalists, though things soon turned awry for them, too. Companies could readily stump up some funding when entering a hot market, but were less viable, on average, and suffered from instability in their long-term market identities.

“Although non-consensus behavior may seem like foolishness at the time, it turns out out to be a wise alternative—if the organization can weather the heightened scrutiny,” the researchers concluded.

Ultimately, the inherent lesson for CEOs is that they must make staff feel comfortable about speaking up, even if that means offending their ears.

“They need to ask if the people who report to them are being quiet about their non-consensus ideas,” Barnett said. “If the answer is yes, then a leader has to wonder what that says about their leadership if people are afraid to suggest counterintuitive strategies.”

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Ross Kelly
Ross Kelly is a London-based business journalist. He has been a staff correspondent or editor at The Wall Street Journal, Yahoo Finance and the Australian Associated Press.

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