Breaking Bad Habits: Defy Industry Norms, Reinvigorate Your Business

Freek Vermeulen: I noticed that I write many of my things, articles and books, and the starting point, often, is a bit of frustration, I guess. For this particular one, about breaking bad habits, it's actually an answer I often – well, quite often – get if I get to know a new company, either because I'm doing research on them or for whatever reason. When I then ask about certain processes or strategic choices that they've made, it struck me that sometimes I get a good answer and I "get it," but quite often I also get an answer that people just say, "Oh gosh, that's how we've always done it," and sometimes even adding, "Gosh, that's how everybody does it in our industry."

I have actually received an answer, quite often, but I remember one specific conversation where the chief executive even said to me, "Freek, look around you. Everybody in this industry does it this way, and everybody has always been doing it this way. And if this wasn't the best way of doing it in our industry I'm sure it would have disappeared by now." That sounds like a fairly extreme answer. I also didn't quite know how to refute it, because there's a certain logic to it, right – if there's a bad way of doing things, competition will weed it out, that's what we assume.

That actually prompted me to start doing research on these types of things, the way we do things, and whether he might be right or not, and the answer is "No." The short answer is "No." There are a lot of bad habits in organizations and in industries, which do not necessarily die out. That was sort of the starting point of the research trajectory that led to this book, and also because I've learned that you can also use that to your advantage and use it as a source of innovation.

Rachel Salaman: Well, I'm sure we'll come onto that in a minute, but first of all, could you be a bit more specific about the kinds of bad habits that we're talking about? What are some examples?

Freek Vermeulen: Yes. So when I say "bad habits " I really mean, say, bad practices in organizations, I also call them, and these can be strategic choices or how we don't keep processes and so on, and I've learned that there are several sources of them, and I'm really thinking about practices that you really would be better off without, or you could say your life expectancy as a company will be better if you didn't do it.

There are several sources of this. One of them is habit, certain processes that firms may have started at a particular point in time. In the book, I give several examples, which made perfect sense at the time, and that can really be a process management system, like ISO 9000 or something like that, or it can be an industry-specific practice. For example, in the book, I talk about a practice in the IVF industry of selecting easy patients, and sometimes these practices come about for very logical reasons, but just because we continue them too long or we push them to too high levels they become, unwittingly, without us realizing it, they become bad practices.

Rachel Salaman: And, as you say, you've looked into the causes of some of these bad practices, and one of them that you talk about in the book is when companies try to copy what their high-performing competitors do, which might seem like a really great idea – "They're doing well, why don't we copy what they're doing?" So, what are the pitfalls of that approach?

Freek Vermeulen: Yes. So certainly, these practices are indeed habits that have started out as good habits but over time, because circumstances change, became bad habits without people realizing it. But sometimes we also copy practices that are just bad to start with. Paradoxically, yes, you rightly say, the source of that can be that we're just imitating high-performing companies, with indeed that assumption, right, if they're high performing surely their practices must be good, then indeed we copy this practice, but others might too, and then the practice may spread.

The problem with that is that sometimes the high-performing companies were already high performing before they started that practice. That may sound slightly silly and obvious, but if we, for instance, look at, say, 10 years ago, many companies would imitate the practices of GE, of General Electric, for instance, on Six Sigma. Well, everybody knew that this practice might have not been causing the success of GE, because it was already successful before it started doing it, but we still imitate it.

But sometimes it might even be that these different practices or strategic choices have different outcomes in terms of risk. You can have relatively safe strategic choices, or you can have very risky ones. Now what we do is that we imitate the highest performing companies, and then we also know from research that we're actually prone to imitate very high-risk choices, because we just look at top performers and we don't look at bottom performers, and sometimes the same strategic choice that made some company end on top is also the same strategy that made many companies fail.

Indeed, again I'm putting it in a fairly extreme way, but it is that subtle process, we look at high-performing companies and those are the practices we imitate, and sometimes, inadvertently, we're just copying some company that basically got lucky.

Rachel Salaman: So what else contributes to bad habits or bad practices developing in companies?

Freek Vermeulen: Well, you must realize that bad practices sort of operate in the same way as viruses in nature, because viruses in a way are very puzzling: the person who has the virus therefore has often lower life expectancy, but that doesn't mean the virus dies out, and bad practices really operate in the same way.

Although that is actually harmful for companies, it doesn't necessarily die out. Now you can wonder, "Well, why do companies adopt it?" because we don't consciously adopt viruses as individuals, but companies have volition, they can choose whether to do a certain practice or not. These practices therefore are tricky. One tricky thing is that they often, in the short term, lead to very quick and almost tangible positive effects. For instance, cost-cutting – cost-cutting in the very short term reduces your cost, therefore improves your performance and we all see that.

What we also know from research is that in the long term it can lead to problems, problems with employee morale, problems with innovation, and so on, but these things only appear in the long term and are very sort of intangible processes and therefore managers miss them. Because we see the short-term benefits we don't quite realize that it is a bad practice, because the harmful effects only happen in the long term and are much more intangible.

Rachel Salaman: Now, you mentioned earlier that some businesses continue with bad practices just because that's the way things have always been done, and in the book, you use the vivid example of newspaper size to illustrate the point. Could you recap that?

Freek Vermeulen: Yes. That's one of the earliest examples and very explicit examples that I encountered. For some reason I was quite… well, you could almost say obsessed with the size of newspapers, say 10-15 years ago, and that's because they just struck me as very impractical, such huge sized newspapers, and actually, I found out that they were also quite expensive to make, these large newspapers. So, at one point I just decided I need to find out where this practice started: why are they so big? Nobody could tell me, the only answer I got was, "Gosh, that's how they've always been," and I remember people in these newspaper companies also saying to me, "Customers wouldn't want it any other way, that's just the way it is."

Eventually, I have to admit, with the help of two research assistants, I found out how this practice started, and it's an interesting story because it started in the year 1712, actually here in London, because the then English government decided that they should start taxing newspaper companies based on the number of pages that they printed, after which newspaper companies decided, "We're just going to print our news on very big pages and print very few of them and hence pay very little tax."

Now that was a very sensible thing to do at the time, but this tax law was abolished in 1835, and after that newspaper companies just kept printing these large sheets of paper, saying, "Oh gosh, that's how we've always done it." That's again a fairly extreme example, but it's also a very good example of how bad habits come about. They may come about for very good reasons but then just circumstances change, we have just forgotten why we started in the first place, to do it this way, and we just continue doing it.

Rachel Salaman: Now, your book outlines 10 commandments of business innovation. Can we talk now about commandment number three, which is,"'Experiment if you can but make sure you do it well." So, what are your tips for experimenting well?

Freek Vermeulen: Yes, it relates to once you've identified a candidate for a bad habit, and maybe you're not entirely sure yet but you think this could be one – sometimes, and I acknowledge not always, but sometimes you can set up an experiment. Where I say "experiment if you can but make sure you do it well" is that I see many companies also set up an experiment, but it's not really a good one. You could say they stack the odds.

I can think of one particular pharmaceutical company that selected drugs to do a different type of marketing practice, and then they concluded, "Gosh, the marketing practice is not a bad habit after all." But when I look at how they selected the drugs to experiment with, they actually selected the drugs that they had low expectations of, to do without what in hindsight I think is a bad habit.

That's a bad way to experiment, because you're varying multiple variables, as we would say as academics. If that's the only thing you can do, a bad experiment, then please don't do one at all. But if you can set up a genuine experiment, then it's a great way to identify potential bad habits.

Rachel Salaman: Two of your commandments are about asking people for their concerns, and that's both insiders and people outside the company. What are some practical ways of doing that?

Freek Vermeulen: Yes. I've learned, when I talk to people in companies and in industries, and I explain to them about bad habits and how they come about and what their characteristics are, that pretty much everybody immediately has candidates in mind about their own company and their own industry, and that is a good first step to start detecting them – and hence perhaps solving them and therefore benefiting from them.

So I've learned that insiders, people from their own companies, often already have certain concerns, but sometimes you need an outsider to ask the question, an outsider actually like myself, for instance, who tries to find out, "How is your company organized?" And then I ask them, "Why do you do this process this way?"

When people start to think, "Gosh, I'm not quite sure but that's simply how we've always done it," that's an excellent role for an outsider. But indeed, sometimes insiders can play that role as well, and particularly new recruits, I've learned, because all of us who have joined new organizations remember that once we've joined that organization, in the first few months we're quite puzzled by some of the habits and practices and processes, and some of the practices we find out, we're not so puzzled anymore and it just took time, but we will have lingering concerns.

I certainly think that organizations should be able to use these new recruits, and basically new insiders, better and in a more structured way, to really listen to them and ask them after a few months or half a year, and systematically ask them, "What are the certain processes that you still don't understand after half a year, and that you have doubts about?" because these people can teach you a lot about your own organization and about your own bad habits. Identifying them, of course, is the first step toward getting rid of them.

Rachel Salaman: You also talk about something called "bundles of business models." So what are those and how does it help to know about them?

Freek Vermeulen: Yes. The examples we've been discussing a little bit so far, like indeed the size of newspapers, are clear examples but also slightly simple examples. Usually, the reality is a bit more complex. For instance, size of newspapers, it's just one practice that you can also stop and you can just print them on bigger sheets of paper. What I mean with "bundles of practices" is that practices – and I mean processes, systems, strategic choices – in an organization are often intertwined, which sometimes makes it difficult to just stop one of them.

To give you a brief example of that, in the book I also describe a case of a hotel chain called CitizenM, a new hotel chain which really took stopping certain bad practices in the industry as a starting point for its new business model. For example, it stopped having check-in desks, it stopped having separate restaurants and separate bars, it stopped the practice of having very big rooms and it made smaller ones instead. But what it did instead of this, downstairs it doesn't have a separate lobby, a separate bar and a separate restaurant, it made one very trendy, luxurious space where they combine everything in one, it's a buzzing place.

Now clearly some other hotels said, "We're going to imitate that practice, this funky lobby that they have." Now when I spoke to one of the founders in the hotel, he walked me over to another hotel around the corner because he said, "Well they copied our downstairs space, come and have a look."

I entered that hotel around the corner, and I won't reveal its name, but I entered the hotel around the corner and indeed it looked identical, it had the same type of furniture, it had combined bar and restaurant, it had the same color scheme, the same layout. It was a copy, but with one exception – it didn't work, the space wasn't buzzing, the space was dead.

There were very few people, they were whispering with each other like you do in a hotel lobby, and that teaches you about "bundles of practices" – you cannot just take one element of a business model and have the same color scheme and the same furniture without copying the other elements.

So this traditional hotel still had a check-in desk, it still had big rooms, it still had a separate bar and so on, and then it doesn't work anymore, you copy either everything or nothing. That makes it difficult to stop a bad habit, but that also makes it an advantage for a company that uses that as a new business model, because it makes a business model difficult to imitate, and therefore a more lasting source of competitive advantage.

Rachel Salaman: I suppose, if we return to what you were saying about experimentation, and that you should experiment by isolating one practice, how does that tie in with this idea of bundles?

Freek Vermeulen: Yes, that's an excellent question, which is indeed why I qualified this idea about experimenting by saying "if it's possible," because indeed certain practices, indeed the ones that you can isolate, you can experiment with, but others you can't because they're intertwined with other things.

Now I also have to say it does not only relate to customers, so let me give you one other brief example. I did a large case study on a South African bank called Capitec, who two years in a row were rated by Lafferty as the best bank in the world. It also really took eliminating bad practice as a starting point for its business model.

One example of this is that in South Africa, if you do a transaction, the fee you pay to the bank is a percentage of the transaction, and it said, "Actually, there's no reason to do that anymore, we needed to do that when money was transferred by physical check, now that it's electronic we can charge a fixed amount, regardless of the amount that you're transferring." Customers loved it, customers really liked that, and Capitec, the CEO, told me, "Therefore I thought all our competitors would quickly imitate it."

That turned out to be not the case, and he said to me, "I gradually figured out why they couldn't imitate this, because it seems a simple thing, a fixed rate rather than a percentage," and he said, "That's because the percentage fee is tied to the budget of the department in this traditional bank, the budget of the department is tied to the head count in the department, hence to the salary of the manager and to the bonuses of the people, and so on, all these things are intertwined, and therefore it makes it very difficult for these existing banks to adapt this one innovation, although it seems a very simple one."

Now that makes it difficult to copy, and that means it's a bundle of practices, but it still means that the bank could have experimented with this. It was reluctant to do this, and it was difficult for internal reasons, but it could have done it. So, you cannot always run an experiment, but sometimes people are also a bit reluctant to run an experiment because it leads to head counts and remuneration and bonuses and so on, and again this proved to be an advantageous thing for the innovator, namely Capitec.

Rachel Salaman: So most of what we've talked about so far is rooting out and changing particular bad practices, something specific. So, let's broaden it out now and look at creating a culture of reinvention in organizations. Firstly, what are the advantages of that approach?

Freek Vermeulen: Yes. So indeed I talk about bad practices and bad habits in the book and where they come from and so on, and it's important to understand that, but it's also important, and I was eager to not leave it at that, to use that for further steps and say, "Now how can you use this to your advantage, but also how can you get rid of them and therefore improve your performance?"

One step in this is that clever entrepreneurs, like the founders of CitizenM, can use this as a new business model, but I also certainly look, as you rightly say, at existing organizations and say, "How can you identify and get rid of these bad habits and practices, but also what you can do as a prevention, how can you prevent that you're going to pick them up and stick with them too long?"

That's an explicit part that I discuss as well, and indeed part of that is creating a culture that does this, and a culture that picks up on them systematically, and that's important because sometimes these habits, eventually they will really harm your performance. And if you wait for trouble, if you're waiting for really a downfall in performance and really a financial crisis, at that point it becomes very difficult to change. What you really want to do is be more proactive, and that's indeed the culture of innovation or the culture of continued reinvention, as you could put it, to pick up on them on a continuous basis, but also proactively to prevent a financial crisis rather than react to it.

Rachel Salaman: In the book, you talk about the hate mail you got when you co-wrote an article for Harvard Business Review titled "Change for Change's Sake." Could you tell us what happened, and the point you were trying to make in that article?

Freek Vermeulen: Yes. Unfortunately, the hate mail is not fiction. It wasn't too extreme, I have to say, but indeed, after publishing this article I did get a lot of, let me put it, "skeptical emails," and that's partly because people sat and thought, "Gosh, I'm going through my third reorganization in five years and now, you dumb professor, you say that's actually a good thing, all this change."

Partly the answer to that is, "Yes, there is value in the process of change," but immediately I should qualify it and say I'm not advocating that more change is better and that all change is good. What I'm really advocating, and I'm saying change for change's sake, is to be proactive and change before you're in trouble, and that is indeed really the message of this article, but also of the chapter in the book – to try and be proactive. And therefore I perfectly understand sometimes people's frustrations about change and say, "Gosh, the CEO is changing things again and we're doing still fine." And partly it's to create some understanding for these CEOs and say, "Yes, but your CEO is also trying to prevent trouble rather than wait for it."

Rachel Salaman: What are the implications of that approach for mid-level managers?

Freek Vermeulen: Yes. So again, I'm very eager to emphasize not all change is good, and I'm certainly not saying the more change the better. In fact, I'm saying, "If you do change proactively, probably, cumulatively, you get away with less change than when you wait for trouble."

So, in that sense, for middle managers, that's one message, try and be proactive, but actually, in this change for change's sake idea and other ideas related to it, as I discuss in the book, there is a big role for middle managers, because much of the change is not just top-down, it's not just a top management team, let alone a lone CEO, thinking about what needs to change.

Creating a culture or an organization where change happened proactively and continuously means that you need a lot more bottom-up initiatives, and that's part of the culture, so that middle managers don't wait for change to be imposed on them but that they're also indeed engaging in this process of change themselves and trying to find these bad habits and identify them before they lead to trouble.

Rachel Salaman: You suggest that people should try to make their lives difficult. How can a manager determine which challenges are worth embracing and working through, and which aren't, so they don't waste their time?

Freek Vermeulen: No, that's indeed an important thing to explain, because indeed I advocate for organizations and, as you rightly say also, for individual employees in firms to "make your life difficult." And I do not mean difficult in the sense of, "Go enter the Chinese market in a completely different product category." That's certainly difficult, but you're unlikely to benefit from it. What I mean with "make your life difficult" – and I'll give you an example in a second – is do difficult variants of your job or of your product.

A quick example of that, I saw, for instance, is in my research in the IVF industry. So, for fertility clinics, commercially it makes sense to treat patients basically who are easy to treat, who you can quickly treat through your standard procedure and that are likely to become a success. But there are also patients that are much more difficult to treat, patients that are difficult to get pregnant, basically, in IVF clinics.

Now commercially, directly, that might not look so attractive, but what I saw in my research in the IVF industry is that doctors – and actually whole clinics – can learn a lot from these difficult patients, and the lessons from these difficult patients also helps standard patients, so they really make your organization better. That's what I mean with "make your life difficult": quite deliberately do these complex variants of your product.

I've seen this in other organizations as well, I've seen this in a company, wound care products, that made wound care products for very difficult wounds in a very niche market, that commercially didn't seem attractive, but it learned a lot from that and its standard products became better.

We even see it in rally car racing. Rally car racing you think, "Gosh, this costs a lot of money," but we see that a lot of innovations that we nowadays see on the road in regular cars originated in rally car racing, in very extreme circumstances. That's what I mean with "make your life difficult" – certain things that are variants of your existing product or service that, on an individual basis, you think they don't make that much sense, but which your employees, your middle managers, even the clinic doctors, can explain to you: "But actually we learn a lot from that, we innovate as a result of it."

Rachel Salaman: Something else you talk about in the book is the "exploitation exploration framework." Could you explain that, and tell us why it's important?

Freek Vermeulen: Yes, that's a quite well-known framework in the strategic management literature, I should say by a famous Stanford professor called Jim March. I discuss it also in this book, but clearly because it relates very closely to this topic, but also because I notice that every CEO I ever talked to, who I interview or otherwise interact with, at some point starts talking about it.

They may not use this exact term, "exploration exploitation," but they do talk about the issue, namely the challenge of balancing exploitation, making money, and exploiting your current competitive advantage, and balancing that with exploration, namely long-term growth and new sources of revenue, and that is indeed a very tricky management issue.

It relates to the topic of the book because too much emphasis on current exploitation gradually leads to bad habits and outdated practices and rigidity in an organization, and silos and all these types of problems. Therefore, you have to balance this short-term exploitation, which is necessary and very useful, but you have to balance it with more long-term sources of renewal, reinvention and innovation.

Rachel Salaman: You talk quite a bit about reinvention in the book, and you say that organizations need to be varied and selective. So, if we could take that in two parts: first, what are some ways to foster variation in practices?

Freek Vermeulen: If you want innovation and if you want renewal and new things you cannot do it without variation. You have to try some new things, and therefore variation relates to exploration and experimentation and all these things we've already been talking about. You have to try different things.

Usually, it's not the CEO or the management team that thinks of all the new things. Occasionally they might have a good idea as well, but innovation has to come from within your firm, from middle managers and so on, and therefore you have to set up some system in your organization to create variation in your firm and let people have ideas and pursue them.

Rachel Salaman: Which leads on to selection. So what can you tell us about that, and how can people be confident that they're not weeding out the wrong things?

Freek Vermeulen: Because selection is the other side of the coin. For innovation and renewal, you need variation, but you also need selection. You cannot pursue all the ideas simply because resources are limited, but also because some ideas will be bad ideas, but you must set it up equally systematically, how you select among the various ideas and project proposals and so on.

Now I actually see that that's where it often goes wrong in organizations, and it goes wrong in often the same way. For example, you nowadays have many organizations that have some idea or schemes, or they fund some proposals and so on, but then we end up with a couple of hundred proposals, and what I invariably see is that we first have a few middle managers that reduce that pile and they say, "We're going to select the 50 best ideas or so," and to select those 50 best ideas they already use existing criteria, the things that fit the current strategy.

Then we give those 50 best ideas to top managers and they pick the 10 that they like best, and the 10 that they like best are actually the 10 that they sort of had in mind already and that fit the current strategy. That is a problematic system because it just reinforces existing ideas. And therefore, often, it's not truly innovative and it may make you miss things.

So, you have to think better about exactly how are you going to organize selection, and selection will have to be a much more dynamic process, but a less predictable process, in a way. That will be different for every firm, but you have to set up an explicit selection system.

Rachel Salaman: Well we've been talking largely about organizations – the bad habits of the book's title are organizational bad habits, largely. Could you talk a little bit more about the role of the individual in this discussion?

Freek Vermeulen: Yes, you are again very right – my book, "Breaking Bad Habits," is about organizations. It's not a self-help book for individuals, it's about organizations, and that's what I do as a Professor of Strategy, but the role of individuals is very big. That is, first of all, because that's what organizations are, they're groups of people, and if you forget about that you're going to mismanage things. You have to remember that they're groups of people.

Where people come into the story is at various points. The first point is already that I hope this talk, but certainly also the book, helps explain why bad habits emerge also in organizations, and that's because it is a very human thing, we repeat behaviors from the past, we repeat behaviors that we see others doing. There's also nothing wrong with it but they can lead to bad habits, so you must remember the human element in this story.

Certainly where humans also come in is to try and identify them and sort of break the bad habits, and therefore it's a human story, because what I certainly hope that people understand is that it's not the responsibility just of top management. Other people in the organization have to understand that, but top managers themselves also have to understand this: you have to organize it in such a way that there is a big role, for example, for middle managers.

So, you have to organize it in such a way that it's not just the top-down process, this constant renewal, but that it's complemented by bottom-up processes, of enabling people to have ideas and to contribute to this.

Rachel Salaman: What's a good starting point for a manager who wants to see this kind of change in his or her organization?

Freek Vermeulen: It's not an easy thing to catch them, therefore there's also not one way in which to solve them, and certainly not something that I can tell you in 20 seconds, but I do think there's an easy starting point, and the starting point brings us back to my earlier point, namely why I started doing this research and writing this book in the first place, and that is this sentence: "We've always done it this way, and everybody else does it this way as well."

I think, as a manager, you should look out for that sentence. You should look out for it when you hear yourself say it, but you also should look out for it when you hear others say it, because if you or your employees cannot explain for your own organization why you do it this way then at least I think you have a suspect and you have a suspect that you say, "is this not a bad habit and could we not do better by rethinking it?" So look out for that sentence, "This is the way we've always done it."

Rachel Salaman: Freek Vermeulen was talking to me in London. The name of his book again is "Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business."

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.