Hailing Outside Prophets Can Threaten Inside Profits

August, 2003

It's been said that no one is a prophet in his own land, but can anyone be a prophet in his or her own organization? Apparently, the ancient adage seems to hold true even in our modern temples of commerce, says Professor Jeffrey Pfeffer. People in most companies, he has found, value knowledge possessed by outsiders more than they do knowledge possessed by members of their own organization.

The finding is revealed and examined in his recent paper, "Valuing Internal vs. External Knowledge: Explaining the Preference for Outsiders," which he co-wrote with Tanya Menon, PhD '00, an assistant professor at the University of Chicago Graduate School of Business. "The study occurred almost accidentally, while we were analyzing a merger," said Pfeffer, the Thomas D. Dee II Professor of Organizational Behavior at the Stanford Graduate School of Business. "We saw how one of the companies proceeded to destroy the company it bought, despite the fact that it had initially held this company on a pedestal," he said. "We became fascinated and wanted to better understand the social and organizational processes underlying the phenomenon."

Such a preference for the knowledge of outsiders, which Pfeffer had also noticed in other contexts, was particularly intriguing to him, given that it seemed to contradict prevalent theories characterizing organizations as being dominated by favoritism for the "ingroup" and biased against ideas from the outside—the familiar not-invented-here (NIH) syndrome. To study the phenomenon, he observed the inner workings of several companies, interviewed their managers and employees, and analyzed data from questionnaires on the subject of preference for outsiders that were administered to business school graduate students.

The first real-life scenario he observed was the merger between two salad buffet chains—Fresh Choice and Zoopa. Initially, Fresh Choice management admired the lively look and feel of Zoopa's restaurants, which contrasted with the relatively sterile environment of their own. While the restaurants were competitors, Fresh Choice turned to Zoopa in order to overcome their own business difficulties by copying food offerings, elements of the restaurant design, and employee motivation initiatives.

Once Fresh Choice decided to "buy the cow," however, trouble began. Before the acquisition, managers described Zoopa's personnel as "bright, "creative," and "energetic," but after the merger, they consistently denigrated the performance of the new arrivals. Within three months of the acquisition's closing, Fresh Choice had lost all three of Zoopa's original general managers.

Why did this happen? One reason, suggests Pfeffer in his study, is simply that when people begin working together, they start seeing one another's flaws. "When you look backstage, you see the efforts that are required for the performance, and you see that those who are engaged in the project are not that different from you," he elaborates. "So familiarity may not necessarily breed contempt, but it removes the curtain to reveal the wizard in all of his imperfections."

Pfeffer also observed the phenomenon "in reverse" at Xerox. In 1994, the company began developing Documents.com, a technology that placed complex word processing services on the Internet, including printing, summarization, and translation. Customers could manipulate their documents with a click and then they would be charged. The project was fraught with funding struggles and infighting as top managers continued to look at it with skepticism over the next few years. Eventually, Documents.com was dissolved. Meanwhile, however, Xerox partnered with an external company named Impresse to adopt a nearly identical product.

"The Xerox case illustrates another reason why people tend to elevate knowledge provided by outsiders—insider competition," Pfeffer says. "If I borrow knowledge from you and you're inside the organization, I've elevated you for promotions and raises; whereas if I borrow knowledge from outside the organization, there's no competitive threat to my status inside the company. Moreover, I've engaged in something that's rather valued, which is competitive benchmarking."

People also place outside knowledge at a premium, Pfeffer says, particularly if they have spent a lot of money to get it. "They see the information as being more valuable, in part because they are trying to justify the expense incurred in obtaining it," he says.

The findings were confirmed by surveys administered to graduate-level business school students at the University of Chicago. Respondents read a scenario in which they assumed the role of managers of a large hotel chain who were conducting performance evaluations of two other managers—one of whom had implemented services that another member of the chain had offered to customers, and one of whom had implemented services that a chief competitor had offered. Participants rated the "external learner" manager as expending more effort and being more creative and competent than the "internal learner" manager, and indicated that they would be more likely to promote him and give him a bonus.

The study has important ramifications for companies' bottom lines, argues Pfeffer. "By overlooking the value of the knowledge that's within your own organization, you're missing lot of opportunities for internal innovation," he says. "And you're going to spend a lot of time and money either hiring consultants or doing what firms do all the time, which is to buy companies for their technology and insights, only to devalue or undervalue those resources once they're inside the organization. So, essentially, you're wasting your money."

MARGUERITE RIGOGLIOSO

Valuing Internal vs. External Knowledge: Explaining the Preference for Outsiders, Jeffrey Pfeffer and Tanya Merton, GSB Research Paper #1776, January 2003.

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