Bob MacDonald on Business

Sage Advice for Superior Business Management

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Peer Group Analysis is the Refuge of the Uninspired

August 14th, 2011 · 2 Comments · Building Better Business Managers, Business Management, Improving Your Business Leadership

A company does not win by being a peer, but by being peerless in the face of competition

Nothing inhibits the ability of an organization to innovate and grow more than to be burdened with leaders who slavishly follow the siren song of peer group comparison and its evil twin, “best practices.” It is a sign of insipid, uninspired and insecure leadership when management seeks to use the actions of peers to measure its results and its future business strategies. Those addicted to peer group analysis clearly signal that they are more concerned with keeping up, than keeping ahead of the competition.

In a professional golf tournament, shooting par may keep you in the game, but rarely does it win the trophy. Likewise, in business being on par with the competition is the path to mediocrity not brilliance. Despite this, peer group analysis has become de rigueur for the ubiquitous army of consultants and most corporate managers. To do so is to forfeit potential, not just to be better than the rest, but to be the best you can be.

So what exactly is peer group analysis?

Well, here is how one consultant (name withheld to protect his pompousity) defined it:

“Peer group analysis is a tool for monitoring behavior over time in data mining situations. In particular, the tool detects individual objects that begin to behave in a way distinct from objects to which they had previously been similar. Each object is selected as a target object and is compared with all other objects in the peer group. The behavior of the peer group is then summarized and the behavior of the target object compared with the summary of its peer group. Those target objectives exhibiting behavior most different from their peer group are flagged as meriting closer examination.”

Wow! How can one not be mesmerized by the simplicity and effectiveness of this type of approach to leadership and management? We can laugh at these clown consultants who offer up this drivel, but they get the last laugh when companies pay them hundreds of thousands of dollars for their “expertise.” And peer group analysis is popping up everywhere, comparing the performance or actions of one organization against another when the environment, resources, employee experience base, capital structure and the management philosophy may be unknown or based on fundamentally flawed beliefs. And, this can lead to disastrous results.

The reality is that peer group analysis is the code for business conformity. Conforming to the norms of business practice is the easiest, least threatening and most comfortable approach to managing, but it is also the greatest enemy of creativity and innovation. The application of peer group analysis is designed to enforce the herd mentality of mediocrity through conformity.

There is an encyclopedia of examples to illustrate the risk of marriage to peer group analysis, but none more chilling than the banking industry. Bankers are like elephants: they are a ponderous, lumbering, muddled and dimwitted species that plods through life holding the tail of the banker in front of them. But, bankers are good for something and that is as an example for the ills of peer group analysis.

When presented with a new idea, the first question asked by a banker is: Who else is doing it and how are they doing it? For decades the last place to get a loan was at a bank. The old saying was that the only time you could get a loan from a bank was when you didn’t need one. Then, after regulations protecting bankers from themselves were repealed, a few of them – greedy for bigger bonuses – began to liberalize loan requirements with those “sub-prime” loans. The rest of the banking pack – deeply schooled in peer group analysis – followed blithely along into disaster; not only for the banks but for the rest of us as well.

Bankers as Parents Should Know Better

There is a strange irony in the wide acceptance of peer group analysis in business. Adults who succumb to its lure are very likely the very same ones who warn their children against being influenced by peer group pressure. Parents consistently encourage their children to find their own way and do their own thing, and not to simply follow what others are doing. This shows that most naturally understand the perils of peer group analysis and pressure, but their actions are nothing more than a cop-out to their kids and their own careers by adopting a “do as I say, not as I do” attitude.

Don’t get me wrong, peer performance analysis is a valuable tool so long as the peer performance “target object” is the previous performance of your company, not others’. Trying to determine what you should be doing by shadowing what other companies are doing is a bad idea. It serves only to level and limit the potential for what can be accomplished.  Just think, for example, where Apple would be today had Steve Jobs contented himself with copying the likes of UNIVAC and IBM. No iPod. No iTunes. No iPad. No iPhone. Just another computer OEM looking to under-price the competition.

Winners like Jobs create their own inner peer pressure. They are forever asking themselves: Are my products and services constantly improving? Am I getting better at what I do each year? Am I closer to achieving my objectives at the end of the year than at the beginning of the year? From a business leadership standpoint, winners analyze the performance of their organization by making its past performance the peer to be analyzed. They compare and ask: Is productivity improving? Are costs being managed? Are sales increasing? Is the culture improving? Are profits growing? This is the most poignant and realistic type of peer analysis because it is based on known factors and on actions that can be improved and controlled. The fact is that if all of these questions can be answered in the affirmative then there is no need to analyze what peers are doing, because it will not be very long before they are no longer peers.

Harkening back to golf as an analogy for peer group analysis, the successful professional golfer will always tell you that they don’t worry about what peers are doing on the golf course. They recognize that the only game they can control is their own game. Keeping an eye on the leaderboard and watching what other golfers are doing is not going to make their game better. Those who consistently win do so because they consistently work to make their game better and don’t worry about what others are doing.

And the Moral of the Story …

It was Ralph Waldo Emerson who wrote, “Society everywhere is in conspiracy against the manhood of every one of its members. The virtue in most request is conformity.” The imposition and acceptance of peer group analysis in business is simply a thinly veiled effort to impose conformity by making it appropriate for everyone to act, talk, think and be the same. But when it comes to success in business leadership, clearly there is no socially redeeming value in the system of peer group analysis that is designed to enforce the herd mentality of mediocrity.

In the end, peer group analysis serves only to level, when the goal should be to levitate.

 

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