The Competence Trap, Emotional Intelligence, Gadarene Swine Syndrome

Among countless true words, Peter Drucker never uttered a thought more truthful than the observation that the only commodity in inexhaustible supply is human incompetence. You can throw in Murphy's Law ('whatever can go wrong, will'). You can reflect on Sam the Gonoph's soliloquy, in which the Damon Runyon character pronounces as follows: 'I long ago come to the conclusion that all human life is 6 to 5 against'. But whichever way you look at this vital issue, the answer is the same. Getting things wrong seems to be much easier than getting them right.

Yet human beings (not least managers) persist in believing, or acting as if they believe, that rightness is all, and can be readily achieved. In one important sense, this belief is absolutely correct. In virtually all cases of error, a right course of action - possibly several right courses - did exist within the available resources and circumstances. Error occurred either because the alternatives were not considered, or because the wrong choice was made. The key question I always ask is this: 'Knowing what you know today, would you have made the same decision yesterday?'

Would Daimler, for example, have bought into the US car market by buying Chrysler, as it did five years ago? Given that the American purchase has dragged down the German parent's profits, contributed to a grisly fall in the share price, and spawned horrific problems for the management, the answer must surely be negative. But it doesn't pay to be too sure about such matters. Maybe Daimler's chieftain, Jurgen Schrempp does now regret his $36 billion buy in his heart of hearts. But it's just as likely that he stands by his original, failed ambition: to create an automotive empire that spans the industry and the globe to make unmatched profits.

AWFUL AFTERMATH
By the same token, President George Bush and Prime Minister Tony Blair are standing by their decision to invade Iraq despite the awful, failing aftermath - huge and ultimately insupportable occupation costs, death and destruction continuing, major domestic political backlash as the pre-war disinformation becomes ever clearer, and the Arab-Israeli conflict worsening. It's true, however, that errors of execution contributed to both the above messes. Even Schrempp has publicly admitted that 'there are one or two things that we didn't do right [at Chrysler] in the beginning'.

Washington has likewise confessed that planning for post-war management of Iraq was grossly deficient. Such admissions are routine, and ignore the fact that, in a corollary of Murphy's Law, bad decisions almost invariably lead on to bad execution - and to bad excuses. Note in Schrempp's limp apologia the phrase 'one or two things we didn't do right'. In fact, error piled on error, and the far-reaching blame lay (and lies) at the top; Business Week quotes one senior manager who thinks that: 'The entire management board is too removed from the business. Things have been going in the wrong direction for a long period of time.'

The pattern of failure for such major snafus (and minor ones, for that matter) is familiar, though none the less depressing for that. It's a cycle which runs as follows:
2. The inadequate analysis goes hand-in-hand with inadequate preparation.
3. When the first bad results begin to flow, they are denied and/or dismissed.
4. Corrective action is finally taken, after too long a delay, with results that, after initial promise, turn to serious disappointment.
5. Management reaffirms its confidence in the original policy, again without sufficiently thorough analysis.
6. The cycle begins all over again.

EMOTIONAL INTELLIGENCE
The key word above is 'committed'. Readers of Daniel Goleman's Emotional Intelligence will have learnt that intellect is less important in human affairs than emotional attitudes. Thus somebody who believes killing people to be wrong in all circumstances (save confronting genuine aggression) would naturally have opposed the invasion of Iraq. Somebody who believes that political self-interest justifies the use of lethal force would take a different view. The two sides can argue about their differing beliefs, but these will not change.

The story of Sam the Gonoph perfectly illustrates this critical split between emotion and reason. The scene is a boat race between Harvard and Yale. A wealthy Harvard is offering 3 to 1 on Yale, which nobody will accept because Harvard is a dead cert to win. But Sam and his fellow ticket touts are only interested in the fact, based on long experience, that 3 to 1 is 'a nice price' - too nice, in fact, for any battle between only two contestants. So they keep on nibbling at the 3 to 1 until they have a large stake riding on this apparently risky proposition.

There is, of course, a grave error here - but not on Sam's part. The rich Harvard was at fault in quoting too generous a price, because of his emotional commitment to his alma mater and his emotionally blind certainty that its boat had to win. Sam also has a commitment - but emotion has nothing to do with it. As he says, what he is committed to is the 3 to 1: wisely enough, since unforeseeable and unforeseen events hand the victory to Yale.

HINDSIGHT AND FORESIGHT
Human (and business) life abound in the unforeseeable and unforeseen, for which you can allow, though only to a limited extent. But most managerial incompetence cannot shelter behind this excuse. Greg Dyke, the Director-General of the BBC, seeking to defend, before the Hutton enquiry, his incompetent handling of the WMD controversy, noted that 'hindsight is a wonderful thing'. That's nonsense: hindsight is available to any fool. It's foresight that's wonderful - and it's foresight for which people like Dyke (and Schrempp) are paid their very large salaries.

Any process of analysis is an exercise in foresight - for example, 'due diligence' is an analysis of available data to demonstrate whether or not an acquisition is likely to prove profitable. Writing in Finance Today, however, consultant Peter Howson points out that due diligence needs to be applied to yourself as much as the target company. He advises would-be acquirers to ask:

Â¥ What is our strategy?
Â¥ How do acquisitions fit into the strategy?
Â¥ Does the target fit the strategy? Why?
Â¥ Do we know where the synergies are going to come from? Have we quantified them in detail? What further information is needed?
Â¥ Have we worked out an implementation plan which will capture those synergies? How do we know it will work? What further information do we need?
Â¥ Have we explored all the consequences of the deal, for example, the effects on current operations, existing personnel, the industry and competitors?
Â¥ Which areas do we need to investigate? Why?
Â¥ What do we really need to know in each area of investigation? Why?

Very probably, like the Harvard booster, the Daimler management took its success absolutely for granted. But Schrempp repeated the mistake of predecessors whose strategy was to turn the company into a transportation giant, making planes as well as cars and trucks. That led to humiliating and costly withdrawal - the same fate that could yet attend the improbable mix that made Daimler-Chrysler. On one side was a high volume luxury manufacturer (in itself a very unusual combination) with global markets: on the other was a mass marketer overwhelmingly dependent on the US.

All Howson's excellent questions presuppose the possibility that the proposed acquisition is a major mistake. That attitude requires a high degree of detachment, which is impossible for somebody whose emotions are already wholly committed (that word again) to the plan. In the preparation of the Iraq dossier which became the central element in the Hutton enquiry, the Blair leadership, already committed to military action, was not looking for evidence that might undermine the case for war. It was searching for the precise opposite - any evidence, no matter how debatable, which would support or appear to support that case.

FAITH AND DOUBT
The predominant emotion here seems to be faith - an irrational conviction that the course chosen was so 'right' that no objections were worth entertaining. The opposite emotion to faith is doubt - and that can be equally inimical to competent performance. For example, the mighty fortune of Warren Buffett rests on simple, strong principles. One is demonstrably and unarguably right: you pick only a few stocks, and only when you thoroughly understand the business, which must have consistently increased sales and operating profits over time, and reasonably expect this consistent performance to continue into the distant future.

You also analyse the stock to convince yourself that it's selling at Sam the Gonoph's 3 to 1 - 'a nice price'. If your conviction proves correct, you never sell. Sell, and you face dealing costs and capital gains tax and lose the magical benefits of compound interest. Buffett shows what happens to a $1,000 investment that brilliantly doubles every two years, first if you sell, second if you simply hang on to your good fortune.

If you sell at the end of the year, reinvest all the net proceeds, then repeat the process every year for 20 years, you end up with a clear profit of $25.2 million.

If you do not sell until the 20 years are up, your profit will then be a sensational sum of $692 million - that is, retention pays over 27 times more than the alternative; the latter, of course, more nearly represents the actual behaviour of nearly all investment managers.

Compared to Buffett, they buy too many stocks and trade in and out far too often. That's why their results are not only far worse than the Master's, but little better, for the most part, than the market's overall performance. The reason for their perverse behaviour is FUD - Fear, Uncertainty and Doubt. In their minds, they must see the unarguable force of Buffett's strategy. In their quaking hearts, they dare not back their judgment to the extent of making rare, very large buys and sticking with their decisions.

GADARENE SWINE
Their fearful reaction is confirmed by the virtually unanimous vote of their peers for the same wrong-headed strategy. This Gadarene Swine Syndrome is a massive contributor to managerial incompetence. The individual manager gains emotional reassurance from the fact that everybody else in an industry is heading over the same cliff. There is some protection and comfort from their concordance - but these psychological rewards are as nothing compared to those of being triumphantly and independently right.

Independent thought and action require more courage and apparently more risk. But what is the risk? You have made your best possible analysis and applied your best judgment. You have taken the best, best-informed and most dispassionate advice you can find. You are intellectually convinced that you have chosen the best course of action that will produce the best possible results. Therefore, what's the risk? Only that you may have made a mistake - and that risk attends all human life, public and private alike.

BMW, after ludicrously trying to broaden its range by buying Rover, corrected its expensive mistake and concentrated on its core business. The shares are up some 80% on 1998: Daimler's are down by half. BMW's far greater risk would have been to carry on with a failed strategy - and that is the risk which Daimler now faces. Observe that the risk arises from not following what may well be the most rational and logical course. And remember the immortal truth of Goya: 'The sleep of reason begets monsters' - and incompetence, too.