Traditional Manager and the curse of Institutional Imperative
December 6, 2007 by Raj Sheelvant
What is Institutional Imperative? It’s a concept that is promoted by Warren Buffett, world’s ‘smartest’ investor. Buffett describes the institutional imperative as the “need” for the managers to act and do like their peers no matter how irrational it may seem. Its peer pressure for CEOs, Executives and the Managers. I have paraphrased the definition from Ken Little’s article Understanding
Traditional managers (I am talking of executives as well as mid level managers) no matter how smart they are will be tempted to follow the herd by that invisible ‘institutional imperative’ force. If companies A, B, C are all doing the same thing, then it makes sense for the managers in company D to mindlessly follow the same strategy. “Hey, may be the managers of company A, B, C know something we don’t know” – that is the thought process of the managers in company D. Never mind, this ‘new’ strategy will take everyone (management, owners and customers) down the road to less profitability. This, from an investor perspective, leads to misallocation of capital and resource causing lower ROE (Return on Equity). Hence Warren Buffett looks for companies with strong management that can resist the curse of Institutional Imperative. This analysis of finding the management is qualitative in nature, and Buffett uses his intuition to identify companies with strong management.
Why is Institutional Imperative relevant to implementation of IT Strategy? Well, if the managers cannot resist the temptations to ‘conform’ to everyone in the industry, then the implementation of their IT Strategy (as a matter of fact their Business Strategy) is not based on their firm’s core competency. Mindless copy-cat Strategy will lead to suboptimal results. I strongly believe that management needs to institutionalize checks and balance to evaluate if their Business Strategy (and their IT Strategy) is not formulated due to the curse of Institutional Imperative. Now, in this hyper growth globalization period, it is extremely important to be very proactive in identifying and resisting the curse of Institutional Imperative. This alone will enable the traditional managers to differentiate their products or services in the long run.
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