Friday, May 17, 2024

The Unfounded Premium for Being Performatively Atypical

All too often, companies pursue me-too strategies.  They blindly imitate industry leaders, and they pay far too little attention to how they might differentiate themselves from the competition.  In some cases, however, company leaders make a point of trying to stand out. Perhaps a very loud statement. Often, these eccentric and iconoclastic business leaders attract a great deal of attention from journalists and investors alike.  These leaders make the case that they are doing business in an entirely different way than more conventional firms in their industries.  They "perform" for the world in ways that attract free publicity and persuade others that they are visionary and groundbreaking. Is it real though? Is all that theater a sign of true differentiation, or is it just smoke and mirrors? Think about the hype generated by Adam Neumann at WeWork. Was that strategy really anything new or revolutionary? Far too many people bought the hype for far too long. 

Now Amir Goldberg, Paul Gouvard, and Sameer Srivastava have conducted a fascinating new study examining this leadership theater that takes place in some companies.  They used machine learning methods to examine the transcripts for more than 60,000 quarterly earnings calls over an eight-year period.  They noticed that some companies used language that clearly tried to articulate how much different they were than their competitors.   You would think that making a case for distinctiveness would be a good thing.  Well, stock analysts apparently thought so.  These companies experienced what the researchers called a "performative atypicality premium."  In other words, equity analysts tended to believe earnings for these "distinctive" firms would be higher than other more "conventional" companies in their industries.  Did actual performance meet analyst expectations?  No.   The premiums were not justified by later performance.  In fact, these companies missed earnings estimates in later quarters.  Analysts believed the hype, and they turned out to be mistaken.  

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What's the lesson here?  Well, being distinctive is important.  However, we need to look for fundamental sources of differentiation, not eccentric leadership styles or vague talk about vision.  We have to ask ourselves repeatedly:  What is really different here? Moreover, we have ask whether there's a true moat around that castle. In other words, even if there is something distinctive about the strategy, the issue of imitability is critical.  Will that source of differentiation and competitive advantage endure, or can others easily emulate it?

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