For much of the past two weeks I have been sitting on a beach on the Pacific Coast of Central America. The conquistadors had come in search of gold and silver. They called this coast the Rich Coast because the natives they first encountered wore extensive jewellery but it turned out this was misleading as the region was sparsely populated and there was no indigenous mineral wealth. They carried on searching and Pizarro found silver to the south in Peru while Cortes found gold to the north in Mexico. Costa Rica was then settled for its agricultural produce, the natives enslaved and centuries of oppression followed. Eventually it became the original banana republic after independence from Spain in 1821 along with the rest of Central America. By 1899 it was the largest producer of bananas in the world and the country was practically run by United Fruit Inc.
Costa Rica tried hard to avoid the political upheavals of its volatile neighbours but the stresses after the Second World War were too much and it fell into civil war. Then in 1949 José María Figueres, having returned from exile to lead the War of National Liberation, established the Founding Junta of the Second Republic. He saw himself as a crusader against communism and corruption. He banned the communists, drew up a new constitution, and launched a whirlwind of social reform. He abrogated Costa Rica’s apartheid laws, gave women the vote, nationalised the banks and insurance companies, and established presidential term limits and an independent body – the Electoral Tribunal – to oversee future elections. Most surprising of all he disbanded the army and declared neutrality. He then stepped down handing power as had been agreed to Otilo Ulante, the winner of the disputed 1948 election.
Costa Rica has maintained its position of neutrality ever since and still has no standing armed forces. Despite the ravages of the wars in neighbouring Nicaragua it continues as the world’s only independent nation, other than Switzerland, without an army. This would be enough to distinguish it but it has another distinction, perhaps even greater. Costa Rica has over 5% of the world’s biodiversity from an amazingly small land area, slightly larger than Switzerland. And after centuries of clearance of its jungles to permit logging and the growth of bananas, coffee and sugar it has now set aside 28% of its land as national parks and reserves, the highest proportion in the world. Associated with this is a high commitment to ecological tourism and tourism in all its forms is now the largest earner of foreign exchange. Second only to that is technology as Intel produces much of its output in Costa Rica attracted by its stable democratic politics and its access to both the Pacific and the Caribbean avoiding the need to go through the canal in neighbouring Panama.
In two weeks of rest and recreation in a delightful resort under a permanent blue sky I could not fathom the source of this originality of thought. It is obviously rare and I fell to thinking about the problems of sticking to the same strategies in business. Nothing is more damaging to business than a determination to maintain existing business models. Just before my holiday I was invited to participate in an event at the Royal Society called ‘Blowing the cobwebs off your mind’, organised by the distinguished business writer Laurie Young and some of his colleagues at SAMI consulting. There were about 80 senior people from different industries and nations, most of them futurists, and all particularly concerned about the prevalence of cognitive bias or in other words, the “Mind of the Market”. Laurie and his colleague Dr Mike Johnston submitted a paper on the subject.
They contend that belief and bias affect strategies and destroy businesses. This goes by several names: “fixed mental models”, “cognitive bias”, “the mind of the market” and “market myopia”. Strategy development is not fully rounded unless it is understood and adjusted for. It may seem strange to some that belief plays a part in business life but actually belief systems affect business life to a shocking degree.
As long ago as 1957 Professor Wroe Alderson of Wharton Business School observed that markets adopt the herd instinct. (1) Business leaders evolve a framework of ideas in which their products and services are developed, launched and communicated. As a result conventional wisdom grows up within an industrial sector which becomes the basis of business policy. Business executives, employees, competitors, suppliers, even customers develop a closed world view which defines and constrains their market.
These beliefs are assumed to be universal truths when in fact they can be profoundly idiotic. In many industries participants assume they are selling commodities and it’s all about price, when in other industries, not wholly different, participants are able to compete with branding and other marketing tools while charging premium prices. Sometimes the beliefs are important founding principles that simply get out of date. Theodore Levitt observed this “market myopia” in his seminal article in the Harvard Business Review in 1960. (2) His study was based on nylon but his most famous example was the railroad companies who defined their market as “Railroads” rather than “Transportation” and so lost their business to the automobile and the aeroplane.
Johnston and Young suggest that possible examples of restrictive mental models might include:
i. The “patent cliff” in the pharmaceutical industry.
ii. The ubiquitous idea that the financial audit has to be a commodity.
iii. The IT industry’s view that technology is speeding up and has to get forever cheaper.
iv. The assumption in business schools that Western management ideas are ubiquitous.
Professors Michael Shermer and Gerald Zaltman have examined this further and call it: “the mind of the market”. (3)(4) Business strategists call it a “closed mental model” because it can inhibit performance. A new entrant coming into a market without these limiting beliefs can exploit the incumbents’ blinkered stupidity.
Established beliefs often pervade even the heights of the business elite. Thought leadership and other external studies can reinforce them. They are rarely challenged by busy executives who instead resort to instinct in making decisions. They are the business equivalent of urban myths. Johnston and Young quote well known shibboleths such as:
• “50% of my advertising budget is wasted, I don’t know which 50%”, or
• “it costs more to recruit a new customer than retain an existing one”, or
• “The average dissatisfied customer tells 13 other people if they experience bad service.”
All are recognisable but none is universally true. A researcher called Andrew Pettigrew attributed strategic inertia to outdated beliefs as long ago as 1973. (5) He demonstrated that companies often hold onto outdated assumptions despite overwhelming evidence that their environment has changed.
So why is this? Why do we allow dogma and belief to get so powerful as to distort and warp our perspective as business professionals? Professor Shermer argues with convincing science that this occurs because evolution conditioned the human brain to recognise patterns quickly; in order to quick-start the reaction to fight or flee. He says that “our brains are belief engines, evolved pattern-recognition machines that connect the dots and create meaning out of the patterns that we think we see in nature”. So clearly business leaders would be wrong to jump to familiar and recognisable patterns when they developed strategy. It would hurt businesses and misuse shareholder funds if they latched onto an idea because it conformed to cognitive bias. Yet there is evidence that that is what they do.
It may be that thought leadership is at the heart of the problem. Gurus sell books in millions if they can come up with a simple idea that appears to explain all business success. One of the most successful of all, In Search of Excellence by Peters and Waterman described a number of companies that appeared to embody excellence. Yet only a few years later many of these paragons were in trouble and some went out of business.
The truth is the world, and the world of business, are complicated. It would be nice to develop simple, elegant models but they are likely to fail. It would be nice once we had perfected our model, after years of trying, to leave it that way, but failure would then only be a matter of time, as change is a constant and our offer has to constantly evolve to meet those changes.
In Costa Rica they challenged the belief system that all nations must have a permanent army to defend themselves. They challenged the belief system that future riches lay in chopping down their forests. They challenged the belief system that their economy could only depend on growing food for richer countries. The money they saved through having no defence budget was invested in education and welfare. As a result they have one of the highest literacy rates in the world, much higher than our own. I’m wondering where to go next on my travels to learn so much about our own failings.
 “Marketing behaviour and executive action” Alderson, W. Richard D Irwin Inc. 1957
 “Market Myopia” Theodore Levitt. Harvard Business Review July-August 1960.
 “The mind of the market”. Michael Shermer. Henry Holt & Co. 2008.
 “How customers think.” Gerald Zaltman. Harvard Business press. 2003
 “The politics of organisational decision making” Andrew Pettigrew Tavistock. 1973
Copyright David C Pearson 2013 All rights reserved