Why following the leader might not be the best strategy
21 February 2014
We are fascinated by exceptional performance. Glossy magazines regularly indulge in hero worship of superstar CEOs in the belief that we can learn from these Gods among us. Equally, we are programmed to reject the worst performers, thinking they must somehow be inherently flawed.
But new research by Dr Chengwei Liu and Professor Jerker Denrell at Warwick Business School suggests that in many commercial contexts, being the best or worst is not necessarily due to innate skill (or lack of it) but instead owes a lot to plain old-fashioned luck. And when we make decisions based on the flawed perception that performance and skill are one and the same – such as who to emulate and who to reward – things can start to go very wrong.
The idea that ‘the rich get richer’ dynamic is visible in many markets, where success breeds success, creating outliers who benefit from a self-reinforcing virtuous circle.
One outlier, Microsoft, had a lucky break early on. An introduction to IBM’s chairman gave it a toe-hold in the burgeoning computing market. Fast forward 30 years and Microsoft is the biggest software firm on the planet, benefitting from classic rich get richer dynamics as people become locked into choosing its products for compatibility reasons.
“The main focus of the media is exceptional performance – outliers that attract people’s attention,” says Dr Liu.
He studies luck and rich get richer effects through computer simulations, case studies and analyses of sports data which show that it is not always the most skilled that reach the top. He calls this the ‘more is less’ effect – the more exceptional the performance, the less you can learn from it as the chances are it is down to luck and self-reinforcing dynamics.
“People try to figure out why they are so successful as presumably they have done something right but our key finding shows that is not the case, particularly for the most successful – they are probably the luckiest.”
Dr Chengwei Lui teaches Behavioural Sciences for the Manager on the Warwick Executive MBA, Quantitative Methods for Business on MSc Business and Issues in Strategy: Theory and Practice on MSc Marketing & Strategy. He also teaches Corporate Strategy on Warwick Business School's undergraduate courses.