Innovation drives markets, but innovation without oversight can result in isomorphism, when one company's breakthrough money-maker turns out to be the downfall of whole industries, according to a leading business analyst.
Isomorphism in business is the tendency of proven strategies to spread over time, leading industries into similar practices that have been successful for others. Unfortunately, without oversight, a practice that is good for one company can be bad for an industry, in the worst case leading to "terminal isomorphism" similar to what struck the mortgage industry a few years ago.
University of California, Berkeley’s Haas School of Business professor Jo-Ellen Pozner recently used the mortgage meltdown as an example of what not to do--that is, mimic the practices of a successful endeavor in one market or company, while ignoring the basic business oversight that executives normally exercise to restrain overzealous follow-the-leader management practices.
All industries suffer from isomorphism, where success is often emulated using the "imitation is the most sincere form of flattery" principle. For instance, look at the iPhone's success and the subsequent smartphone industry where a large proportion of new models imitate it. That model for success is currently being repeated by all the touch-screen tablets that imitate Apple's iPad.
Growth in mortgage loan fraud, based on U.S. Department of the Treasury Suspicious Activity Report Analysis.
Imitation in and of itself is not a bad thing and often makes sense as a mass marketing strategy. For instance, Microsoft's MS-DOS imitated an earlier operating system called CP/M from now defunct Digital Research, and later Microsoft's Windows imitated the Apple Mac OS, resulting in a highly successful software dynasty.
However, isomorphism goes too far when it emulates practices that do not reflect mainstream business know-how, leading, in the worst case, to an industry meltdown, which Pozner calls "terminal isomorphism."
Pozner gives an example to illustrate this point. "It might be that one firm (firm A) in a given industry starts promoting very junior employees to supervisory positions. Because those places become attractive to the youngest, freshest and most innovative crowd (if that's what those very junior employees represent), those people flock to firm A. Eventually firms B, C and D catch on and begin to do the same. What you would see, eventually, is a bunch of firms racing to get this young talent, overpaying those employees, putting them in roles they are not prepared to handle, and alienating more senior employees. Eventually, those organizations will be so overwhelmed with internal organizational issues they will be unable to spend the time necessary to innovate. So although promoting the "cool kids" was rational at the individual firm level, at the industry level it becomes self-destructive," said Pozner.
In regulated industries, like that causing the mortgage crisis, the answer is closer supervision by regulatory bodies, but for the rest of the business community, the answer is closer supervision by corporate executives to avoid moving from "Main Street logic" to "Wall Street logic," according to Pozner.
Our research "explains more than predicts, but we hope to increase people’s awareness and give them the tools to be more vigilant and identity potential problems earlier on," said Pozner.
Pozner performed the analysis with professor Paul Hirsch at Northwestern University’s Kellogg School of Management, and University of California, Berkeley Haas doctoral candidate Mary Katherine Stimmler.