All this useless drivel fed to us by the mass media reminds me of the first part of The Halo Effect.
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In January 2004, Lego Group had their biggest annual deficit in the company’s history ($230 million). The media reported the company as one who has strayed too far from its roots–it has spent the past few years relying on merchandising spin-offs, like the Harry Potter figures. As a result its CEO was axed and the grandson of the founder was sent to replace him.
W H Smith is another example of this scenario. An established book and periodical retail chain founded over a hundred years ago, it has diversified its offerings in 1980 to include music, office supplies, gifts, and stationeries During its rough times at the start of this decade up to the start of 2004, analysts explained that their problems were caused by them drifting away from its core products.
Also around the start of 2004, Nokia was facing fierce competition from its Asian counterparts. To address this, they diversified their products and services to include games, imaging, music and even complex wireless systems for corporations. While this was going on, instead of using the terms straying, which implies the company is moving away from its roots in a negative manner, or drifting, which implies that the company does not have a clear goal, the media outlets reported this as the company expanding.
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Now, these three scenarios are the same: companies trying out (gambling into?) new ventures in the hopes of reaping bigger revenues. The way things are reported, however, look suspicious.
First off, the simple explanations of “straying” and “drifting” couldn’t adequately explain the financial problems of the Lego and W H Smith. In Lego’s case, what would have happened if they stuck to their roots, did not branch out sell merchandise for the most popular books this decade, and eventually posted an even bigger loss? We’d expect the media to simply blame their lack of vision, their cautiousness, complacency, or even arrogance.
Also, who’s to say that the two companies drifted from their roots. Merchandising and branching out to electronic toys are still within Lego’s field, and going into gifts and stationeries isn’t that different from what W H Smith was doing in the first place; there’s no need for training or new equipment. Now consider General Electric who has drifted… no “expanded” into financial services like banking. You don’t see media questioning their approach because GE was successful in that endeavor.
And what about Nokia? They’ve just started out their new venture so it could go either way. How does media portray it? By using a neutral word to allow them to follow through depending on the outcome. Analysts might say “it’s a good idea” or “it’s going to doom the company” but more often than not, they’ll follow that up with disclaimers allowing them to slip through in case they make a mistake.
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What we don’t hear much is the detailed explanations behind the issues. We are shown oversimplified explanations because the very nature of businesses doesn’t allow careful study of all of the causes of a company’s failure or success. Maybe diversifying helped the company, maybe it did not. Maybe the recession prevented the company from getting a larger market share, or maybe it did not. Maybe the company increased it’s productivity enough to take the lead, or maybe the competitors were too busy improving their products that they neglected to innovate.
The main point here is that we cannot expect the media to tell us the entire story for such complex situations in the business world. The media only provides these simple and easy-to-digest explanations because people need explanations.
As mentioned in the book, when you tune in to CNBC, you’ll expect to hear something along the likes of “The Dow is up slightly as investors gain confidence from rising factory orders”. But when you look at the daily fluctuations of the stock market, you’ll see that they resemble Brownian motion, like the jittery movement of gas molecules or pollen. You just don’t expect the news anchor to say “The Dow was down half a percent today due to random Brownian motion”.
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We’re going to see more of these freaky realities in the next posts on The Halo Effect.
