The Red Queen

“They were running hand in hand, and the Queen went so fast that it was all she could do to keep up with her: and still the Queen kept crying 'Faster! Faster!' but Alice felt she could not go faster, thought she had not breath left to say so. The most curious part of the thing was, that the trees and the other things round them never changed their places at all: however fast they went, they never seemed to pass anything”.

Have you read Lewis Carroll’s “Through the Looking Glass”? If so, you might remember the passage above when Alice meets the Red Queen. They are running and running, but appear to be stationary. Competition among organisations can have the same effect. In order to keep up with competition, firms have to change continuously, in terms of adopting new technologies, launching new products and services, adapting to new business models, etc. Sometimes it can feel like a race, and be quite exhausting.

“Suddenly, just as Alice was getting quite exhausted, they stopped, and she found herself sitting on the ground, breathless and giddy. Alice looked round her in great surprise. 'Why, I do believe we've been under this tree the whole time! Everything's just as it was!'

'Of course it is,' said the Queen, 'what would you have it?' 'Well, in our country,' said Alice, still panting a little, 'you'd generally get to somewhere else – if you ran very fast for a long time, as we've been doing.' 'A slow sort of country!' said the Queen. 'Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'

Although quite exhausting – if you don’t like running – it does make organisations better. Professor Bill Barnett, from Stanford, studied Red Queen effects among companies at length. He found that those exposed to ongoing competition and change improved considerably and became much stronger firms.

This is due to a “Darwinian effect” and a “learning effect”. First of all, in such a race, the weakest firms go bankrupt, leaving only the strongest competitors. However, it also stimulates firms to learn and adapt quickly. And if you’re learning and adapting, and becoming a more agile competitor as a result of it, it prompts your competitors to do the same (or die). It’s a bit like an arms race… But one that consumers, and society as a whole, benefit from.

Bill documented another, long-term effect though; sometimes everybody is running in the wrong direction. Or at least, someone took a bit of a wrong turn and everybody followed. It is related to this thing we call the success trap; firms have been running in a particular direction only to find out that the world has just changed and some other corner of the market has become more attractive. This triggers the entry of newcomers, while the original leaders struggle to catch up, simply because they had advanced so far into the other corner of the world.

This is nothing new; we’ve seen it in the disk-drive industry, but also among freight companies using sailing ships when steamboat technology was introduced, among retail banks adopting innovative products and technologies, petrol stations evolving into self-service stations, with car-washes and mini-markets, in the steel industry when mini-mills emerged, tyres in the automotive industry changing from bias to radial technology, and so on. The Red Queen is everywhere, and there are few places where you can afford to stand still. And if you want to get into such a race, look for an industry where everybody is running in the same direction; they’re bound to get stuck in a corner some time soon.

THE GROWING OWNERSHIP OF PRIVATE EQUITY IN MEDIA

The privatization of Clear Channel Communications ends a 2-year effort to buyout the leading radio and outdoor advertising firm. The $17.9 billion buyout by Bain Capital and Thomas H. Lee Partners allows the new owners the opportunity to pursue strategies with less influence from unpredictable investors pursuing short-term interests. The sale comes amid heavy competition in terrestrial and satellite radio, but provides the new owners more flexibility in deciding how to best operate the 900 radio stations, radio programming services, and subsidy that owns one million outdoor ad locations.

The sale is just one more in a growing trend for private equity purchases of media firms. Their interest in media companies stems from the fact that the market value of many does not reflect the underlying cash flows and asset values or the mid- to long-term prospects of the firms.

The valuation challenge of media occurs in good part because advertising expenditures are not evenly distributed throughout the year and because advertising revenue is significantly affected by fluctuations in the economy. These variations create significant disquiet among stock market investors because they make revenue, returns, and dividends less predictable in the short term.

These realities—combined with unproven beliefs of many investors that new media are displacing all mature media and making growth in their businesses impossible—reduce the valuation of media stocks and make media firms attractive to private equity firms that think about the businesses in terms other than quarterly performance.

“Shareholder value orientation” – now, where did that come from?!

Well, it came from the US. And, alright then, a bit from the UK.

For the (blissfully) ignorant among us, what is it? It is the view that the purpose of a public corporation is to maximize the value of the company for shareholders. Traditionally, we find this orientation in Anglo-American societies. The view that the public corporation is more a social institution which has to consider the interests of various stakeholders, including shareholders but also employees, customers, the local community, etc. is the traditional soft stuff found in other parts of Europe and Asia (although, over the last decade or two “shareholder value orientation” has been spreading like a forest fire – pardon the analogy – gaining geographic terrain even in previously unlikely homes such as Germany, France and so on).

Whenever I ask a group of executives or MBA students in my classroom “to whom is the primary responsibility of a company?” nine out of ten people will wholeheartedly shout “shareholders!”, with usually a small, minority contingent on the backburner – with a suspected long-term Marketing indoctrination – arguing that “the company should adopt a customer-focus” and always place customers first (because that’s the best thing to do in order to gain shareholder value I guess…).

But why is that? Why do we immediately assume that the primary beneficiaries of organisations should be shareholders? I even find that quite a few people get a bit annoyed if not angry by even raising that question – like it is some God-given truth, which can’t be opened for debate and is even quite embarrassing to think (let alone talk) about.

Don’t get me wrong, I am not saying that companies shouldn’t do it but surely it is not a “law of nature” or so that a company is ultimately (only) responsible to its shareholders. It’s a choice. And like with many choices in business, that means that it is something worth thinking about every now and then; whether it is really the choice you want to make.

My former colleague (the great) Sumantra Ghoshal – who unfortunately died some years ago – would even argue (if inebriated) that shareholders are not owners at all, at least not of the company. He would argue something like the following (and a posthumous pardon to Sumantra if I remember his argument slightly incorrectly; he would often not be the only inebriated party in the conversation…): He’d say, if you own a dog, and the dog jumps into your neighbour’s house and wrecks the place, you are responsible for all the damage. However, if you own shares in an oil company and one of its oil-tankers shipwrecks and causes a billion dollar in damages to the environment, you’re only responsible for the extent of the monetary value of your shares; that’s the maximum you can lose.

Although Sumantra of course realised the legal reality of the situation, his argument was that therefore a shareholder’s ownership rights are just as limited as his responsibilities. As a shareholder, you’re an investor, which gives you the rights to for instance dividends, but it doesn’t make you the “owner” of the place in our traditional sense of the word.

Moreover, he would continue to argue that as an employee you often give a lot more: your intellectual capital, loyalty, ideas, firm-specific skills and investments, etc. And companies would do well to solicit such “gifts”. And if as an employee you give a lot more (than just money), and a lot more of yourself, perhaps you’re also entitled to more, in terms of the company’s loyalties and priorities.

COMCAST FORGETS THE BUSINESS IT IS IN

Sometimes companies forget what businesses they are in and Comcast seems to be the latest media and communication company to do so.

The problem evidenced in the dispute between the FCC and Comcast over its traffic management policies blocking or slowing BitTorret and other files in violation of FCC network neutrality rules requiring open access. Without addressing whether regulators or Comcast are right in the dispute, it is clear from the company’s response that it has lost sight of it core business.

Comcast argues it was engaging in reasonable business practices by limiting the flow of BitTorrent files (often used to download large video, audio, and text files) because they push up the flow of traffic and slow the system. In Comcast’s view, the system and its integrity are its raison d’etre and represent the business it is in. It is easy to understand why the company and its executives might think so.

Comcast spends the majority of its effort and personnel creating and maintaining its system and infrastructure, tackling issues of system capacity and capabilities, and working to ensure system reliability and speed. It provides video, Internet, and voice services via 575,000 miles of wires serving 15 million cable subscribers, 13 million Internet users, and 4 million digital home providers. In the last three years Comcast has spent $13.6 billion in capital expenditures on the system.

Unfortunately, the extraordinary network it operates and maintains—the lines, switches, head-ins, Internet and telephone connections—are not the business of Comcast, they are just the requirements for conducting the business. Its real business is providing customers access to the video, audio, text, and voice communications they desire.

Its central purpose is serving the needs of the end users, including those who want to acquire capacity-eating BitTorrent files. It is the purpose that its executives seem to have forgotten when they decided their network management practices were more important than the wishes and desires of their customers. Their absent mindedness is not completely surprising, however, because the company has long had one of the poorest records of customer service among media firms. Lots of problems develop rapidly if you think it would be a good business if you just didn't have to deal with bothersome customers.

Are overconfident CEOs born or made?

Most acquisitions fail. That’s not even a point of debate or opinion anymore; the evidence from ample, solid academic research is quite overwhelming: about 70% of acquisitions destroy value, and this has been the case for many, many decades.

The question is, of course, what causes acquisitions to fail, and what causes managers to undertake them in spite of their rather dismal track record? Various complementary explanations have been offered but, remember, “failure” here simply means that the acquiring company does not create sufficient extra value out of the acquisition to recoup its (usually rather hefty) acquisition premium. One prominent explanation is that the average CEO suffers from “hubris”, or “overconfidence”. They think they will be able to create more value through the acquired company than these silly people who are currently running the show, because of “synergies” or simply because they’re much better and smarter than the sorry souls who are currently messing about in that block of bricks they call a firm.

Therefore they’re willing to pay an acquisition premium. Yet, it’s apparent that usually they are overestimating their abilities, because the average CEO/acquisition does not create any surplus value - quite the contrary. Fact is (assuming that managers are well-intended and do expect to create value through their acquisitions; some people even disagree with this assumption), on the whole one can only conclude that most of them are overconfident because in 70% of the cases they don’t manage to pull it off.

But where does their overconfidence come from? Does the average CEO suffer from hubris because that’s the type of person that makes it to the corporate top? That’s one possibility. The other one is that, over the course of their tenure, often top managers gradually become overconfident, rather than that they're suffering from hubris from the get-go.



Professors Matthew Billett and Yiming Qian from the University of Iowa examined this exact issue, using a sample of 2,487 American CEOs undertaking a combined 3,795 deals over the period 1980-2002, and they found some very compelling evidence that overconfident CEOs are made and not born that way.

They initially uncovered four things. 1) They discovered that CEOs’ first deals, on average, did not destroy value: Their effect on a company’s market value was pretty much zero, 2) those CEOs who had experienced a negative stock market effect in response to their first acquisition usually lost their appetite for doing any more deals, 3) in contrast, those CEOs who – hurrah! – had experienced a positive stock market response to their first take-over got the hots for deal-making; they were very likely to undertake even more acquisitions in the ensuing years, 4) those subsequent deals, however – that is, take-overs by CEOs who had done some before – on average did destroy shareholder value! Hence, the consistent finding in academic research that acquisitions destroy value seems to be caused by CEOs’ later deals only. Matthew and Yiming concluded that first-time, successful deals make CEOs overconfident, which not only stimulates them to do even more deals, but also makes them inclined to pay even heftier take-over premiums for subsequent ones, which they usually are unable to recoup after the acquisition.

Finally, they also examined “insider-trading”; whether CEOs would purchase their own company’s stock in the period preceding the acquisition (confident that they would increase in value as a result of the deal). Most CEOs did, whether they were first time deal makers or experienced acquirers. However, the effect for experienced acquirers (people who had done deals before) was twice as big as for the novices. Apparently, overconfident serial acquirers – who mostly ended up destroying shareholder value – most of the time fell into their own hole; they bought the shares whose value they were about to destroy! Guess there’s a hint of justice in this story after all...

THE FAILING STRATEGIES FOR DRAMA ON NETWORK TELEVISION

The announcement of the finalists for the 2008 Emmy drama nominations shows how weak major television networks have become and the feeble program strategies they are now employing. AMC’s “Mad Men” and FX’s “Damages” became the first series ever produced by basic tier cable channels to become finalists for best series and they were joined in the 6 nominee list by Showtime for “Dexter”.

The results were even worse for networks in the major acting categories: Only 1 of the five Emmy nominees for lead actor and 2 of the five for lead actress went to network programs.

Overall, 24 cable network programs received nominations and 7 cable channels received 10 or more nominations. HBO received 85 nominations—beating out all the broadcast networks, Showtime received 20 nominations, and AMC received 20 nominations.

Drama is a bellwether of the health of television programming and networks continue to fair poorly. It is a particularly important genre, socially and culturally, because it allows explorations of beliefs, attitudes, norms, aspirations, and fears better than other program types. However, success is unpredictable and good drama is expensive to produce. Historically it was the province of the well funded dominant networks, but that has now changed.

The decline of quality in network television programming is directly related to the increasing number of channels available in households. As the number of channels increases, the average number of viewers declines, producing declining advertising support, and thus reducing resources available for program investments. The responses of networks have been predictable. They offer more game shows and reality programs that are less expensive to produce, avoid productions that are edgy and innovative, and rerun programs as much as possible.

Network prime time filled with shows such as “I survived a Japanese Game Show”, “Wife Swap”, “Nashville Star,” and The Bachelorette” and the networks wonder why they have trouble capturing audiences and gaining financial resources. When they do provide drama it is all too often formulaic and a spin off from an already successful series. There are strong tendencies for network drama to have a criminal or legal practice oriented or take a prime time soap opera approach, such as “CSI”, “Law & Order”, “Desperate Housewives”, and “Grey’s Anatomy”.

The program challenge has been growing worse year after year since the development of cable television channels in the 1970s. I don’t want to be interpreted as saying the networks have produced no fine drama, but the amount has declined precipitously.

This raises the question of why cable channels are able to follow an opposite path, increasing their production of drama and gaining more acclaim for their work. The simple answer is money. Having additional sources of income other than advertising frees programs from the necessity of seeking audiences linked to interests of advertisers and from the content influence of advertisers. It allows producers, writers, and directors to employ greater creativity, to address controversial subjects, and to take the time to ensure quality in the production.

Subscriber-supported HBO has the longest and most distinguished record in producing original drama with highly rated and acclaimed series such as “The Sopranos”, “Angels in America”, “Six Feet Under”, “Deadwood”, “Band of Brothers”, and “Sex and the City”. HBO is premium channel financed by subscriptions from about one third of American households, a clear example that many viewers want and are willing to pay for innovative, quality programming.

In recent years there has also been significant growth of drama from cable channels receiving both subscriber and advertising revenue, thus giving us programming such as USA network’s “Monk” and TNT’s “The Closer”. Original television drama is now being produced by other channels, such as AMC, Lifetime, and Showtime, as well.

One of the side effects of the increased production of drama by cable channels is that they are now playing significant export roles and their programming is regularly appearing in prime time on national channels, especially public service channels, in Europe and elsewhere.

Network executives need to seriously reconsider their programming strategies, particularly where drama is concerned, or they risk become secondary channels in the years to come. Unless they find ways to develop and support quality drama, it will increasingly become the trophy programming of cable channels in the years to come.

Chief Story Teller

What do CEOs really do? Stevie Spring, CEO of Future Plc (the magazine publisher), recently expressed it to me in the following way: “I am not really the Chief Executive; I am the Chief Story Teller”. What (on earth) did she mean with that?

What really is an organisation? Well, it is a group of people – sometimes a rather large group of people – (supposedly) working towards a common goal. This goal may simply be profit, but it certainly helps if we have a common idea of what we’re trying to do in order to make a profit. Hence, it is about setting a clear strategic direction.

A clear strategic direction is not a 40-page document outlining a firm’s strategy – that’s a drawer-filler. It is a concise set of choices that determines what we do and don’t do. For example, for Future it’s something like “special interest, English-language magazines for young males, possibly with spill-overs on-line and in terms of events”. Hence, they would for instance do a magazine on “guitar rock” but not on “music” (as that is not focused enough to be considered a special interest); they would do such a magazine in the US but not in German (then they might license it); they would cover motorcycle racing, or Xbox or wind-surfing, but not knitting (unless, without me realising it, knitting has recently had a popularity surge in the community of 20-something old males). Thus, it determines what you do, but it also determines what you don’t do, because it doesn’t fit your expertise and capabilities.

And Stevie Spring tells that story – over and over again – to a variety of constituents: to analysts and fund managers, board of directors, employees, customers and even the occasional business school professor.

Good CEOs have a story. Tony Cohen of Fremantle Media says they want television productions to which they own the rights, with spin-offs in other areas (e.g. on-line), which are replicable in different countries – simple and focused. Alistair Spalding of Sadler’s Wells theatre wants to be involved actively in producing a broad array of cutting-edge modern dance, aimed at a London audience. Frank Martin of Hornby wants to produce near-perfect scale models of model trains (and Scalextric race tracks) for collectors and hobbyist, which appeal to some feeling of nostalgia. Their stories are clear and simple; employees, investors and customers alike can understand and believe in them.

Is being able to tell a convincing story enough for a good strategy? I guess not – for instance, I remember a Goldman Sachs analyst writing about Enron in October 2001 (weeks before its bankruptcy) “Enron is still the best of the best. We recently spoke with most of top management; our confidence level is high."

However, it certainly helps. When you have a lousy strategy, without much focus or logic to it, it will be hard to come up with a coherent and convincing story. And it’s a good story that makes people want to invest in you, that carries the day when you need your board’s support (e.g. when making tough choices what to divest or invest in), and what helps your employees see their task and decisions in light of the company’s overall direction. It's the strength of the story, which makes the CEO.

Similar, not the same, but just alike

Sometimes CEOs are just like normal people.

Normal people – you and I (well... at least you) – as we know from ample research in social psychology, have an inclination to conform to certain peer groups, in the way we dress, speak, which music we like, how often we brush our teeth, buy a car or go on a holiday. Yet, on the other hand, we also like to stand out from the crowd (if just a little bit). It’s known as “optimal distinctiveness theory”.

We see the same thing in organisations. Some years ago, I was working with an executive (which will remain blissfully anonymous) in charge of expanding his company into foreign markets, mainly through acquisitions. We analysed his strategy and various market characteristics, through which it became obvious that the Scandinavian market, in his line of business, appeared to be particularly attractive. Yet, he clearly did not even want to think about entering this area. When I persisted in probing why, his answer was frank: “Look, none of my major competitors are active in that market, so there must be something wrong with it”.

I was slightly stunned, but that was the end of it.

Until, a few months later, I ran into him again. Having asked what he had been up to he answered, “I’ve just entered the Scandinavian market”. Upbeat, I asked him whether my advice had finally convinced him. His reply was, “not exactly… it is just that [my biggest competitor] has just entered the Scandinavian market, so it must be a good place after all”.

I am not making this up, or even exaggerating (for a change). Was he unusual in this behaviour? I think he was unusual in terms of the frankness of his admission, but not so much in terms of his behaviour. One of the biggest influences on strategic decision-making – if not the biggest influence – is imitation. We do what others do around us. Academic research has indicated over-and-over-again the prevalent nature of imitation among a wide array of management decisions, such as the adoption of conglomerates, choice of location when entering foreign markets, implementation of performance management programmes (such as ISO9000 or Six Sigma), product market entry, matrix organisations, and so on and so forth.

Yet, like individuals in everyday life, CEOs don’t like just doing what everybody else is doing; sometimes they just want to do something a bit different. For example, I recently analysed a large database of about 800 companies in the pharmaceutical industry, focusing on the breadth of their product portfolio, and the statistical results clearly indicated that companies sometimes also choose to do the exact opposite of what their peers are doing, merely for the sake of doing something else.

Similarly, some time ago, I was working with some executives of a British newspaper company, who faced the decision whether or not to also adopt the new small-size paper format, just like several of their peers/competitors had. Ultimately, they decided against it. One of the executives said “had we been the first one to come up with the idea, we would have done it, but now that others have done it before us, we can’t; it just wouldn’t be very original”.

And in a way, I like this attitude. Granted, when you simply do the opposite of what others are doing, or explicitly do not want to do it just because your peers did it, you’re as much influenced by peer behaviour as when you’re an imitator (only 180 degrees opposite). Yet it also brings a bit more variety to the world, and hence makes life a bit more interesting. It gives you the opportunity, as a firm, to not be average and stand out from the crowd. And, who knows, perhaps even make an above-average profit as a result of it.

Analysts, astrologers and lemmings – three of a kind?

“Financial forecasting appears to be a science that makes astrology respectable”, Burton Malkiel, professor of economics at Princeton, once said.

As you know, analysts, employed by investment banks, follow a number of firms (usually in a particular industry), evaluate them and offer us recommendations – in terms of “buy”, “sell” or “hold” – whether we should invest in their shares.

However, on average, these analysts give the advice “sell” in less than 5 percent of the cases. Yet, clearly, more than 5 percent of listed companies’ share prices go down. So what’s going on?

Well, there are various explanations but one is that, for various reasons (pertaining to incentives in investment banks), analysts are inclined to cover firms that they expect will go up in terms of share price. Therefore, perhaps an even more important decision than whether to recommend “buy, sell or hold” is the decision which firms to cover.

And this is where it gets tricky (and almost a self-fulfilling prophecy). Research has shown that the stock price of firms goes up when they gain analyst coverage. That is, purely the fact that a research department (employing the analyst) decides to start covering the firm will increase its share price, probably simply because the firm becomes more well-known, is exposed to additional investors, which enables it to raise capital more easily, etc.

But how do research departments decide to start covering a firm? Well, research by professors Huggy Rao, Henrich Greve and Jerry Davis shows that this is very much influenced by imitation. They analysed 1442 firms listed on the NASDAQ stock market and the analysts covering them and, through elaborate statistical analysis, showed strong evidence that when one analyst starts covering a firm, his colleagues at other investment banks are inclined to start doing the same (irrespective of this firm’s performance), thus creating a “cascade” of analyst coverage.

However, Huggy and his colleagues showed something else. Their models’ findings also revealed that, in such cascades, the imitating analysts were prone – more than usual – to overestimate the firm’s future performance. And this made it very much a mixed blessing for the firm. Because analysts are inclined to cease coverage of companies which are underperforming in comparison with their predictions – which was very likely in this case, given the analysts’ over-optimism – firms that initially benefited from increased analyst coverage were the same ones that subsequently were likely to suffer from analysts abandoning them.

The analysts, much like lemmings, optimistically jumped in, only to find out that the place they landed in wasn’t as rosy as they had expected. This prompts them to jump out again, saving their skin, but leaving the firm trampled and bruised.

Inebriated cyclists

Remember the old anecdote of the man looking for his keys under a lamp-post? Here’s my version:

A guy exits a pub in the middle of the night. There, he sees a man on his arms and knees under a lamp-post, clearly looking for something. He asks him “what are you looking for?” and the (slightly inebriated) man answers “the keys to my bicycle; I must have lost them”.

“I will help you look” says the guy, and on his hands and knees he starts to search too. After a good ten minutes have passed though, still not having found the keys, he turns to the inebriated cyclist and says “are you sure you have lost them here, we’ve looked all over and they’re nowhere to be found?!”

“No” says the man (pointing towards a dark spot to the side of the road), “I lost them over there, but there it is so dark, I would never be able to find them”.

The morale of this well-known story is that we often look for solutions where there is light and we can see stuff, while the real cause of the problem lies in an area which is much more difficult to fathom.

Managers are often inebriated cyclists. If a company or division is in financial trouble, they cut costs, slash head-count, disinvest, set stricter targets and so on; the stuff that can be captured in numbers (i.e. “where it is light”), while the real cause of the problem will often be a lot more subtle, and lie in a tainted reputation, low employee morale or low service quality. And looking hard where there’s light won’t make you discover the key to solving your problems any quicker.

Vice versa, the hard stuff (which can be captured in numbers), such as production capacity, headcount, etc., are exactly the things that cannot give you much of a competitive advantage; they often can be bought off the shelf, meaning that your competitor can get it to. It’s usually the soft stuff, such as morale, reputation, organisational culture, etc. (which we don’t spend much time measuring, largely because they’re difficult to observe and capture in numbers) that can make all the difference, because they can’t be bought and take much time and effort to develop.

Hence, don’t be misled by the hard stuff, which you can measure; of course you need it but it will seldom give you a competitive advantage or get you out of trouble. The soft things, which we cannot see and measure, are the ones that you have to carefully nurture and manage.

Complex yet so simple. Or was it the other way around…?

As a junior professor, starting to teach strategy at the London Business School, one of the first cases I ever discussed was that of a hotel chain in the south of the US, called La Quinta. It was a great example, not only because it came with a video featuring the famous Harvard Business School professor Michael Porter (who was goofy enough to make me look normal), but because it illustrated a particular point well: That, over time, successful organisations become both more complex and more simple.

What the heck did I mean with that (my students tended to ask)?! Well, over time, successful firms fine-tune their organisations to do even better what they already do well. They learn to operate through a particular set of procedures, gradually develop and employ a very appropriate yet intricate incentive system, organise a few specialist departments or functions focused on some specifically thorny issues, and grow a culture which is highly suited for the task at hand. And, as a result, they become quite a subtle and “complex” organisation.

Yet, such an organisation usually is also quite simple. What did I mean with that – complex AND simple…?!

Well, such an organisation becomes extremely suited for the thing it does, but suited for that one thing only. Hence, it’s a complex organisation, but “simple” in terms of what it can do.

For example, at the time, La Quinta hotels tailored to traveling sales people. People who are on the road all the time, work on commission, and often receive a travel budget (which they can spend or pocket). La Quinta targeted those customers (and those customers only). They located themselves literally on the highway, often next to a large parking lot. They did not operate any restaurant or offered any form of room-service but that was fine; opposite the parking lot would always be a diner, McDonalds or Pizzahut, and the salespeople would be happy to use those.

They did have spacious and very quiet rooms, which were standardised across all La Quintas, among others to give the salespeople a familiar feel away from home. And, above all, they offered low prices. It was perfect for the sales people, and every aspect of a La Quinta fell perfectly in line with the sales people’s needs. In this sense, La Quinta’s entire organisation was very subtle and “complex”.

But that would also make it simple. It could only do one thing, and target only one type of customer: the sales people. As soon as something would happen that kept away the sales people – a recession, a large business center in the vicinity moving away, etc. – the hotel would be vulnerable. It could not switch to high-end executives; after all, it didn’t have a restaurant, room service or business center. But it could also not switch to tourists; they were located on a highway for Pete’s sake, at a parking lot across from a diner! Let alone that they operated a family pool.

That’s the danger of being both complex and simple. You learn to do one thing very well; but one thing only… And when the world changes on you – which it usually does – that might get you into trouble.