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 / Spring 2007 / Issue 46(originally published by Booz & Company)


Lessons of the Last Bubble

Although following the herd may appear rational in periods of high uncertainty whenever the herd dynamic is evident, there is reason to be wary that an opportunity has peaked. Jeffrey Immelt, CEO of GE, recently warned an auditorium of MBA students at the Darden Graduate School of Business to avoid the herd instinct; he cited his own experience upon exiting Harvard in 1982. He noted that he and only one other classmate joined the staid General Electric Company that year, just months after Jack Welch took the helm and launched what would become a phenomenal 20-year period of growth. What was the biggest employer of Harvard MBAs in 1982?  A “hot” technology company called Atari; it took on 17 graduates. (By 2002, of course, when Welch retired, Atari was long dissolved, its brand name sold to Hasbro Interactive.)

The biggest risk of the herd instinct comes when the stampede turns and heads in the opposite direction with equal abandon. When the dot-com craze reversed itself, millions of investors lost a large proportion of their retirement accounts. And more than 100,000 dot-com employees lost their jobs in the 10 months from October 2000 to July 2001. When bubbles pop, many people get hurt.

To avoid the bubble, we recommend lots of little experiments that send the herd in many different directions. Avoiding the “get big fast” strategy and the herd instinct allows for a more thorough investigation of the terrain. Many members of the herd will fall upon barren terrain and die, but in the long run, careful nurturing of the fruitful routes will produce a greater herd than overgrazing of the fertile patches discovered by the lucky few.

More Bubbles Ahead?
There’s already evidence that history will repeat itself, in the form of new business bubbles. Consider nanotechnology, the science of controlling materials and devices at a molecular scale. In March 2001, the National Science Foundation issued a report forecasting a nanotechnology market of $1 trillion by 2015. Products already employing nanotechnology include stain- and wrinkle-resistant fabric, digital cameras, and tennis equipment. Could nanotechnology produce another bubble economy with overhyped expectations followed by a painful correction? A recent report identified more than 800 companies involved in nanotechnology, including many public companies. Does that figure represent enough experimentation for a market estimated to grow at 44 percent per year for the next dozen years?

Renewable (“green,” or non-fossil-fuel-based) energy represents another example of promising but unknowable market potential that would benefit from lots of experimentation. In 2000, Clean Energy Incorporated forecast a market of $23 billion by 2005; the actual market was $24.2 billion. Although reasonably accurate overall, the forecasts overestimated the potential for fuel cells by a factor of two while significantly underestimating the potential for solar energy. Current forecasts are for nearly fivefold growth over the next decade, but the question remains: Will the growth come from fuel cells, solar devices, wind energy, or other new forms of renewable energy? Given such uncertainty, lots of little bets are likely the best course.

The phenomenal growth in business process outsourcing (BPO) and offshoring may be the latest example of a herd already in a stampede. The International Data Corporation estimated the 2005 BPO market at $627 billion, growing from a market of $60 billion seven years ago. India, a country with a GDP of just over $500 billion, “exported” $16.1 billion in IT services and $5.1 billion in BPO services in 2006, according to Plunkett Research Ltd. The cost savings potential from outsourcing and offshoring clearly warrants serious managerial attention, but how many of these decisions reflect a herd mentality rather than serious consideration of the long-term strategic implications? The worldwide market for offshored research and engineering services now tops $18 billion. Can the developed world afford to give up critical competencies in intellectual property creation? Can businesses afford not to tap into the intellectual resources available from developing countries? One thing is certain: The best results will come from serious reflection and experimentation that challenges our assumptions, not from simply following the herd.

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