Freek Vermeulen

Research interest: Strategy, innovation, growth, organization theory
Qualification: PhD, [Tilburg; Utrecht], Associate Professor
Nationality: Dutch
At LBS since: 2000
Connect with me:

Michael Levie, a seasoned hotel executive, and Rattan Chadha, a successful retail entrepreneur, were having dinner. The topic of conversation was the hotel industry. Both men thought that the industry was stale and too homogeneous relative to the diversity of customers it sought to serve. The industry had largely been unaltered since the onset of hotel chains over half a century ago. As Levie put it, “in this industry, people already think they have innovated if they have painted a grey wall green.” They two men were plotting to change that.

In 2008, they opened their first hotel, at Amsterdam Schiphol Airport, followed by one in Amsterdam City in 2009. Further hotels followed in subsequent years, in Glasgow, London, Rotterdam, New York and Paris. They called their budding chain “citizenM”; for mobile citizens. The customer group they envisioned consisted of frequent travelers; people who could just as easily be visiting the aforementioned cities for a quick business trip as for a leisurely weekend away with their partner. As they put it, “a mix of explorer, professional and shopper.”

The men thought that these customers, on arrival, really did not need a porter to pick up their luggage and carry it to their room – after all, they had likely just brought it all the way from the airport on their own. Moreover, when entering the hotel, they would not find themselves in a large lobby with a check-in desk. Instead, citizenM installed check-in machines that dispensed keys when guests inserted their credit card.

Space comes at a premium in hubs such as New York and London, and Levie and Chadha realized return on square footage was going to be key. So they also crossed out restaurants, bars, and conference facilities – amenities most travelers rarely use. (The solo business travelers Levie and Chadha envisioned as their customers, for example, would prefer to get some sushi at a self-service counter to sitting at a table alone being served by a waiter, and weekend leisure travelers would likely be eating out at restaurants anyway.) Instead, what guests encounter[…]

Do you work for a firm where managers think employees really have to work (what is called) “full time”? That fourty hours per week (or whatever is considered “full time” in your profession) is really a necessity? Perhaps you are one of those people with that conviction yourself — that in your job it is really not possible to work ‘part time’.

Of course you are wrong: working five out of seven days is really just as arbitrary as six days, or three – or twenty-eight for that matter. Chopping up the total amount of work that needs to done in your firm into blocks that suit our human physiology has nothing to do with the actual work. If the total amount of work that needs to be done in a firm in one week equals 20,000 hours, it is just as arbitrary to chop that up into 500 40-hour work weeks as it is to chop it up into 800 blocks of 25 hours. A five-day work week consisting of eight-hour days happens to be the social norm in many of our societies at present, but I have long thought that a company that disrupts that kind of social norm in its industry could potentially build a momentous competitive advantage out of it.

Let me give you an example. The management consulting firm Eden McCallum, from London, does strategy work much like McKinsey, the Boston Consulting Group, and Bain – but with one important exception: none of its roughly 500 consultants are on the payroll. All of them work on a freelance basis. Around the time of the dot-com boom in 2000, founders Liann Eden and Dena McCallum saw that many of their ex-McKinsey colleagues would love to continue doing some consulting work, just not full time. Many of them wanted to do a few consulting assignments on the side while they started their own company, wrote a book, or took care of their children, or just worked less. Others, it appeared, did not mind working full time at all, but they disliked some of the other things that came with being a partner in a traditional consulting firm, such as working on internal committees and appraisals, or doing customer acquisition. Still others were happy to work full time but[…]

When something seems too good to be true, it usually is. And management techniques, practices, and strategies are no different. When you read a business book or attend a presentation on a particular management practice, it is a good habit to explicitly ask “what might it not be good for?” When might it not work; what could be its drawbacks? If the presenter’s answer is “there are none”, a healthy dose of skepticism is warranted.

Because that’s unfortunately not how life works, and that’s not how organizations work. It relates to what Michael Porter meant with being “stuck in the middle”: if you try to come up with a strategy that does everything for everyone, you will likely end up achieving nothing. If you focus your strategy on, for instance, achieving low costs, you will likely have to sacrifice delivering superior value on other dimensions, and vice versa.

Similarly, “doing well by doing good” – enhancing your firm’s financial performance by achieving superior corporate social responsibility – is often easier said than done. When confronted with an ethical decision – e.g. whether to dump toxic waste in a developing country, where it may not be illegal, when all your competitors do so as well – sometimes it will cost you (a lot of) money to do the right thing. Dozens of academic studies have tried to establish a positive link between corporate social performance and profitability, but for every study that finds a (modest) positive correlation, there is one that doesn’t.

But it seems some organizations do pull it off.

Take the company Aravind Eye Care in India. It was founded in 1976 specifically to provide cataract eye surgery. They modeled their operations on McDonalds: high volume, highly efficient operations, based on division of labor and cost efficiency. It is a very profitable operation; the company has a gross margin of 50 percent. Yet, the remarkable thing is that they treat 70 percent of their customers for free. The 30 percent that do pay are relatively affluent people who can afford the operation, but who receive pretty[…]

Strategic decisions often have long-term consequences – in fact, that might be the reason we consider them “strategic” in the first place. Sometimes, organisations have to accept some short-term pain for long-term gain. In a way, any investment is like that. However, conversely, certain decisions with short-term gain can also have more painful consequences in the long-run. The problem is that managers often see the short-term benefits – and that’s what they base their decisions on – but they are unaware of the potential long-term negative effects.

For example, together with Mihaela Stan from University College London, I conducted a large research project on IVF clinics in the UK. These fertility clinics are obliged to publish their success rates (number of treatments that lead to a birth), for the sake of “transparency” and “consumer choice”. However, in response, many of them started to select their patients: patients with a good prognosis are welcome everywhere, but quite a few clinics refuse patients with a poor prognosis, in order not to mess up their success rates. Mihaela Stan and I found that this practice works – at least in the short-run – in the sense that clinics that are more selective enjoyed higher success rates.

However, what these clinics are not aware of is that they also learn a lot from treating difficult patients. When we computed the so-called “learning curves” of all the clinics in the business, we discovered that the ones that did treat a relatively large number of poor-prognosis cases improved their overall success over time quite dramatically. In fact, they learned so much from these difficult patients – in terms of new innovative processes, tests, and techniques – that, after a year or so, they overtook the clinics that thought they were being clever by doing easy cases only. That is, their success rates in fact became significantly higher – in spite of treating more difficult patients! Hence, the selective clinics – in the long run – shot themselves[…]

When digital music became available online, through various file-sharing websites, the music industry witnessed a substantial decrease in sales. The big recording companies – EMI, Sony, Universal and Warner – blamed the decline on piracy and intellectual property rights infringements. They responded by suing thousands of individuals who had shared digital music, resulting in several landmark court cases. The industry also responded by adopting technology – digital rights management (DRM) technology – which was embedded in music files purchased on-line, that made copying all but impossible. However, in April 2007, EMI unexpectedly removed such DRM technology from its music files, which then enabled individuals to share the music files they had purchased with others.

The question

EMI’s move came as a surprise; so much, that many thought it was an April fool’s joke. This would obviously harm their sales, wouldn’t it? Individuals could not only share the music files they purchased with friends and family, but technically they could potentially also upload them on sharing sites. Surely, enabling this form of piracy would depress EMI’s sales? Yet, 2 years later, the other three record companies followed suit.

The question how it affected record companies’ sales is pretty much impossible to answer by just looking at the numbers, because there is no way of telling how sales would have developed had the record companies not removed DRM technology. Then, however, a clever PhD student from the University of Toronto – Laurina Zhang – spotted a golden opportunity to do some truly illuminating research. The fact that EMI removed DRM some time before the other three record companies, created what researchers excitedly call “a natural experiment”. She realised that by exploiting the time difference between these events and running a so-called difference-in-differences statistical model, she would be able to draw firm conclusions about how lifting DRM had affected sales. Eagerly, she got to work.

The answer


Some time ago, a London friend of mine in was diagnosed with a severe medical condition, which required urgent yet complex surgery. The condition is rare but, fortunately, there appeared to be several specialists both in Germany and France who had each treated hundreds of cases during their careers. When it comes to specialist operations, experience is key, so he was going to visit each of them and then make a decision.

However, when I spoke to him again, he had just decided where he was going to have the operation: in the hospital in his hometown in Spain. I was surprised; there was no specialist in that hospital. But he explained to me that he had flown to his home country for another opinion and that the local surgeon had made a good impression and was very pleasant. Moreover – he added – after the surgery, he would have to stay in the hospital for two weeks and it would be nice to do that near his family.

I was stunned. My friend is a rational guy, in charge of a large company.  I have no doubt that, if he had been making this decision for me, he would have immediately recommended me to go to one of the real specialists, wherever they were in the world. He would have told me that where I would spend the two weeks in a hospital bed and whether the surgeon was a good conversationalist are quite immaterial. But, when making this important decision for himself, emotional considerations took over. And unfortunately, the initial operation was not successful, and my friend ended up having to travel abroad to see one of the specialists anyway.

And many of us would make the same irrational decision, with the same troubling consequences. Whether it’s a personal choice or a strategic business decision, emotions often crowd out objectivity. Precisely because they are such important choices, loaded with anxiety and uncertainty, when faced with a major decision people start to “follow their heart”, “rely on intuition” and “gut feeling”, overestimate their chances of success, and let their commitment escalate.

Good leaders don’t let their emotional bonds  cloud their judgment. Sound leadership requires objectivity. What can[…]

Of course, every company says they have a strategy. In fact, I am pretty sure most of them have a document labelled “Our Strategy”, or at least a powerpoint presentation of that name. But, in fact, not many companies really have one. Here are some of the most common mistakes – or poor excuses for a strategy.

Goals are not strategy. “We want to be number one or two in the market”; I am pretty sure you have heard that one before. Well, it is not a strategy; it is a goal. And there is nothing wrong with having an aspiring goal, but strategy is how you endeavour to accomplish it. Strategy involves making choices; genuine choices. Of course, being number 1 or 2 in the market is not really a genuine choice, which requires trade-offs, and giving up something that could have worked as well. Nobody will choose to be number 32. In fact, a Silicon Valley CEO wrote to me saying “it is like stating, ‘My strategy to win the 400 meters at the Olympics is by running faster than anyone else’”. A good goal, but it does not tell you anything about how you intend to achieve it. Your route towards the goal; that is strategy.  

Strategy is not what you were doing anyway. Most companies, when writing up their strategy, look for some formulation that fits in all the things that they were doing anyway. There is nothing wrong with that, if what you are doing, happens to constitute a consistent set of coherent choices, i.e. a strategy. But more often than not, it leads to some amorphous statement that is designed with the sole purpose of not giving anything up; no matter how disjointed the current set of activities. The worst I have seen was the supermarket conglomerate Ahold, which stated to be “multi-format, multi-local, multi-channel”. It did not exclude anything. Not coincidentally, this was shortly before they collapsed.

Strategy is not secret. Some companies really have formulated a wonderful strategy; a coherent set of genuine choices about their value proposition and the precise set of customers that they are going to serve, but when I ask middle managers lower in the organisation, they are unable to tell me what it is. I am sorry, but[…]

For decades, strategy gurus have been telling firms to differentiate. From Michael Porter to Costas Markides and through the Blue Oceans of Kim and Mauborgne, strategy scholars have been urging executives to distinguish their firm’s offerings and carve out a unique market position. Because if you just do the same thing as your competitors, they claim, there will be nothing left for you than to engage in fierce price competition, which brings everyone’s margins to zero – if not below.

Yet, at the same time, we see many industries in which firms do more or less the same thing. And among those firms offering more or less the same thing, we often see very different levels of success and profitability. How come? What explains the apparent discrepancy?

To understand this, you have to realise that the field of Strategy arose from Economics. The strategy thinkers who first entered the scene in the 1980s and 90s based their recommendations on economic theory, which would indeed suggest that, as a competitor, you have to somehow be different to make money. Over the last decade or two, however, we have been seeing more and more research in Strategy that builds on insights from Sociology, which complements the earlier economics-based theories, yet may be better equipped to understand this particular issue.

Consider, for example, the case of McKinsey. Clearly, McKinsey is a highly successful professional services firm, making rather healthy margins. But is their offering really so different from others, like BCG, or Bain? They all offer more or less the same thing: a bunch of clever, reasonably well-trained analytical people wearing pin-striped suits and using a problem-solving approach to make recommendations about general management problems. McKinsey’s competitive advantage apparently does not come from how it differentiates[…]

Last month I was interviewed by a journalist from Korea’s Maeil Business Newspaper (the local equivalent of the Financial Times). After quite a lengthy interview, he ended with the question “How would you define a ‘great company’?”

At the time I thought it was a bit of a lame question, but that my answer to him was at least as lame: I babbled something that I would 1) judge a company by its performance – a long-term record of above-average profits – and 2) that employees should really be enjoying being part of that organisation.

As said, at the time I thought it wasn’t my sharpest answer of the day, but when I thought about it for a while, afterwards, I started to really like the question; and even appreciate my answer to it! This might be my memory playing dirty tricks on me – in a feeble attempt to protect my self-image – but, admittedly, if asked today, I would likely give more or less the same answer to that superb question.

I think most would agree that you cannot say some firm is a great company when it is habitually underperforming but, to me, great financial performance is not enough. At the end of the day, an organisation is nothing else than a collection of individuals working (more or less) together. If the people who constitute the organisation do not enjoy being part of it, I have a hard time seeing it as a great company.

I realise some of you might prefer to bring customer satisfaction into the mix, if not other stakeholders. Yet, to me, employee satisfaction is the pivotal point of departure. The legendary founder of Southwest Airlines – Herb Kelleher – used to proclaim that employees (“not customers or shareholders”) were most dear to him. That’s because he figured, if you have happy employees, they will make your customers happy. And happy customers will come back, which will eventually make your shareholders happy too (and, not coincidentally, Southwest had a generous profit-sharing scheme, basically[…]

It is often said that when change happens in an industry, it is initiated by outsiders (rather than incumbents). That is because the incumbents – as existing, central players to an industry – suffer from inertia, vested interests, if not plain arrogance. It is relative outsiders – allegedly – who do not have these limitations, and therefore should be able to do things differently. Or so they say.

However, causal observation of many industries suggests that outsiders often also fail to initiate change. Instead, they quickly conform to existing industry norms and behaviours.

This is because inertia is not only caused by a firm itself, but also by its context. Doing business, firms need to work with others, and even though the firm itself may be willing and inclined to things differently, it may be these partners that are holding them back – causing them to conform to existing norms and standards. We label this “contextual inertia”.

In this video, I give an example of Champagne houses, who purchase the necessary grapes from grape growers – a market I have been examining with my colleague, Amandine Ody, from Yale. We found out that grape suppliers “punish” houses for doing things differently, not according to the industry’s norms, by raking up the prices they charge them for their grapes.

But – strikingly – they punish some houses more than others; in fact, they charge even steeper price increases to relative outsiders who try to do things differently. This means that outsiders find it even more difficult to initiate change in this industry: