Thursday, October 8, 2009

Business Success Is Mostly Luck And Not Managerial Excellence

A number of studies have assessed the degree to which firm performance, both good and bad, persists across time. But none, to our knowledge, has compared the observed number of sustained superior performers to the number that we would expect by chance. Doing so is vital because research...suggests that luck strongly affects firm performance in a world in which boundedly rational decision makers face strategic choices that involve high levels of causal ambiguity, complexity, and uncertainty.
From the paper, "How Long Must a Firm be Great to Rule Out Luck? Benchmarking Sustained Superior Performance" by Andrew D. Henderson of the University of Texas at Austin, Michael E. Raynor and Mumtaz Ahmed of Deloitte Consulting LLP.

The authors looked at 20,000 companies and found:
On the basis of this analysis, one of many findings was that, among firms with 11 years' worth of data, 4.3% would rank in the top decile five or more years by pure luck. Thus, among the 856 companies with 11-year records, 37 would be expected to achieve that number of top rankings merely by chance, meaning that any of the 45 firms in that select group would present an 82 percent likelihood of being a false positive.

What would it take to get the number of false positives down to an acceptably low proportion, say about 10 percent, not only for that group of firms but in general? That would require that a firm be in the top 0.2 percent -- in other words, that it rank above 99.8% of all other firms over the same span of years. In all, 150 firms achieved that rank out of the more than 20,000 companies in the database.
Read the complete Academy of Management press release here.

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