Dominant Logic

Dominant logic refers to beliefs and practices that we assume are valid, that we do not question, and which underlie our thinking and choices.  Dominant logic can be about people or how the world works.  We may be aware of our dominant logic or, more commonly, it is subconscious as it is what we take for granted.  Individuals may have a dominant logic, one may be shared across a team, within an organization, or even across an industry.  Dominant logic perpetuates the way things are (and have long been) and can prevent us from seeing new possibilities in changing circumstances. 

Breaking Dominant Logic Can be Transformative

Transformative change often comes from breaking the dominant logic.  John C. “Jack” Bogle questioned the dominant logic in the investment management industry and pioneered low fee index funds for individual investors in 1976 [1].  His innovation changed how individuals invested, reshaped the industry, and continues to benefit millions of investors. 

Investment management was centered on the reasonable idea of experts analyzing companies, then buying and selling company stocks to maximize returns for the mutual fund portfolio they managed.  These actively traded or managed funds charged substantial fees of investors.  Bogle’s contrarian idea, which later proved revolutionary, was that over the long term most actively managed funds would not provide returns that could beat broad market averages.  Some funds could but there was no way to know in advance which ones would.  Most would yield below-average returns over the long term. 

Bogle instead proposed that individual investors would be better off by investing in an “index fund” that simply mimicked a broad market index like the S&P500.  Hints of this idea can be found in his 1951 senior thesis at Princeton University [2, 3].  The 1973 book A Random Walk Down Wall Street by Princeton professor Burton G. Malkiel and a 1974 article “Challenge to Judgment” by Nobel laureate Paul Samuelson provided further intellectual foundations [4].  Bogle later gave Samuelson a lot of credit, writing, “Samuelson was much more forceful, strengthening my backbone for the hard task that lay ahead: Taking on the industry establishment.” [1]

In 1976, Bogle created the first index fund for individual investors [5].  The stocks in its portfolio were of all the companies comprising the S&P500.  With no active trading, this “passively managed” fund had low expenses.  He lowered costs further by not using brokers and marketing directly to individual investors.  And he eliminated the sales charge funds imposed for investing, making his index fund also the first “no load” fund.  As a result, he was able to charge investors a fee to cover expenses that was a fraction of those charged by actively managed funds.  Bogle’s pioneering index fund was ridiculed by the investment industry, especially by those who made a living picking stocks.  They called it “Bogle’s folly” [6].  Some went so far as to call it “un-American” and “a sure path to mediocrity” [7].  In his 2007 book, Bogle explained that actively managed funds were like looking for a needle in a haystack; investing in an index fund was buying the whole haystack [8].  Index investing went against another dominant practice that did not serve most individual investors well – buying stocks of particular companies in the hopes of high returns over the long term. 

Acceptance of index funds came slowly, as is typical of novel innovations.  The investment management industry looks very different today.  Low fee index funds have mushroomed.  They now constitute 43% of all stock funds [9].  By 2018, Vanguard, the company Bogle created, managed $5 trillion for 20 million customers in 170 countries [10].  As Bogle had argued, over the last 15 years, more than 90% of actively traded funds have performed worse than their associated market average [11].  And since 1984, less than half such funds have beaten Vanguard’s Index 500 mutual fund [12].  Although actively managed funds remain a big part of the industry, their fees have slid down due to the competitive pressure exerted by index funds.  Many funds are now no loads.  Bogle, who passed away in January 2019, is now called the “father of index funds”. 

While breaking dominant logic often plays a role in transforming business or society, there are many additional factors involved in bringing about such change.  We should not assume that an innovation that goes against a dominant logic in society is enough to change it.  The Segway was intended to transform transportation and benefit the environment by replacing fossil-fuel based vehicles with the battery-charged personal transportation device [13].  Years later, it has still not made a noticeable difference.  Google Glass is another example.  We can be wrong about how easy it is to change a dominant logic.  People may not want to change their dominant logic.  The alternative we provide may not be compelling.  Transforming society takes lots of time, effort, and thought.

Some Dominant Logic Should Be Reinforced

Not every dominant logic should be changed.  Part of the value system in medicine is to “first, do no harm.”  A related idea is to “put patient first.”  In industries such as chemicals, accidents that injured or killed employees were common until companies deliberately made practicing safety a dominant practice.  Such dominant logic should be reinforced and spread. 

Surfacing Dominant Logic

Identifying dominant logic can be hard because our beliefs are often subconscious and practices that we take for granted tend to become invisible with time. But questioning what we do and how we think could surface a dominant logic that is worth changing.

What can we infer from our thinking, choices, and actions? What practices do we observe around us that we take as normal, routine, acceptable - the way things are done? “What” and “how” questions are useful.  Two less commonly asked questions are “why” and “why not”. They may be even more useful in surfacing dominant logic because they are often sparked by something unexpected, unusual, puzzling, or by injustice.

Some more ideas that could help surface dominant logic…

Investigating Not Getting Desired Results.  When you are working on something and not getting the results you desire, it is helpful to ask the question why a few times to understand the sequence of causes preventing desired outcomes.  Among the causes may be the dominant logic.  Such thinking requires care, though.  In thinking about causes, it is quite possible to miss what we take for granted or what is subconscious.  It would help to do this exercise with someone else not involved in the problem solving task. 

Thinking About Odd Data.  Seeing odd data or something that doesn’t make sense should also inspire asking why, why not questions.  

Anant Kumar marketed and sold contraceptives, IUDs, and sanitary products to clinics and hospitals in India.  During his customer visits, he observed a wide variance in comfort, cleanliness, and quality in clinics and hospitals.  Good quality organizations were fewer, privately owned, charged high prices, and catered to the rich.  Low and middle income people could only afford poor quality providers who were in the majority and included government hospitals.  That is how it had always been.  Bothered by the injustice of it, especially the scenes he observed in maternity wards, he decided to somehow create an affordable hospital that would provide good quality care to women of modest economic means.  He succeeded in creating a pioneering chain of maternity hospitals that provide safe, good quality care to low and middle income women, including the “working poor” [14]. 

Taking Outsiders Seriously.  Transformative change often comes from outsiders and newcomers because they are more likely to be puzzled by what insiders take for granted.  It is useful to be attentive to their reactions and take their puzzlement and ideas seriously.

For years, telecom software entrepreneur Mo Ibrahim would tell executives at telecom companies in Europe that they should expand into Africa to provide wireless service [15]. He was confident the potential market was big. He failed to persuade anyone. Their views of Africa were clichéd and not rooted in reality.  Eventually, Ibrahim decided to launch wireless telecom himself.  He created the profitable, successful, pioneering company Celtel that operated in multiple sub-Saharan countries. 

Dominant logic can prevent us from seeing possibilities when dealing with the unfamiliar – whether people, place, or situation.

Looking at Other Settings.  Looking at practices in another setting, whether it be a business, industry, culture, or country can make differences stark and reveal variance in dominant logic in the two settings. Once the difference is visible, it is easier to ask the why and why not questions.

For example, “minute clinics” are a relatively recent innovation in the United States while in many other countries clinics are commonplace and the main vehicle for healthcare delivery. The two settings reveal differences in dominant logic. When launched, minute clinics were a departure from dominant forms of healthcare delivery in the United States.  Another example is a recent report that infants are more likely to die in the United States than in Cuba [16].  No doubt, that will come as a surprise to many.  It is an occasion to explore the dominant logic in both settings to develop useful solutions.  More generally, the United States spends the most on healthcare but has middling results to show (e.g., life expectancy).  To improve the healthcare system in the United States, a useful step would be to compare it with those of some other countries to identify things that we may be taking for granted and which require changing.    

Jacqueline Novogratz pioneered social impact investing by creating the Acumen Fund that brought together ideas from economic development, investing, and business to break the prevailing dominant logic that held back people at the bottom of the global income pyramid [17].  Novogratz drew upon her experiences in international banking, development work, microfinance; working in several countries, including low-income ones; and her education in international relations, economics, and business.  Occupying different domains makes it easier to discover the dominant logic worth changing. 

REFERENCES

[1] Bogle, John C. (2011). “How the index fund was born,” Wall Street Journal, September 3.

[2] Bogle, John C. (1951). The Economic Role of the Investment Company. Princeton University Senior Thesis. http://arks.princeton.edu/ark:/88435/dsp017m01bm63k.

[3] Bogle, John C. (2004). “Vanguard: Child of Princeton”, speech given at the Princeton Entrepreneurs’ Network 5th Annual Conference, May 28. http://www.vanguard.com/bogle_site/sp20040528.htm.

[4] de Swaan, J.C. (2019). “Vanguard’s John Bogle created more social good than any contemporary in finance,” Quartz, January 18.

[5] A Remarkable History - Historic Milestones. https://about.vanguard.com/who-we-are/a-remarkable-history/

[6] Malkiel, Burton G. (2019). “The secrets of Jack Bogle’s investment success,” Wall Street Journal, January 17.

[7] Press Release (2019). “Vanguard announces the passing of founder John C. Bogle,” January 16, https://pressroom.vanguard.com/

[8] Bogle, John C. (2007). The Little Book of Common Sense Investing. John Wiley & Sons: Hoboken, NJ.

[9] Heath, Thomas (2019). “Vanguard founder Jack Bogle dies at 89; pioneered the index fund,” Washington Post, January 16.

[10] https://about.vanguard.com/who-we-are/fast-facts/; accessed January 21, 2019

[11] Pollack, Harold (2019). “Jack Bogle exposed the frauds on Wall Street – and helped the middle class save,” Washington Post, January 17.

[12] Wyatt, Edward (2019). “John C. Bogle, founder of financial giant Vanguard, is dead at 89,” New York Times, January 16.

[13] Kemper, Steve (2003). Code Name Ginger: The Story Behind Segway and Dean Kamen’s Quest to Invent a New World. Harvard Business Review Press: Boston, MA.

[14] Bhardwaj, Gaurab (2013). Addressing Neglected Populations Profitably: Insights From LifeSpring Hospitals. Report.

[15] Ibrahim, Mo (2012). “Celtel’s founder on building a business on the world’s poorest continent,” Harvard Business Review, October issue, v.90, no.10, pp.41-44.

[16] Kristof, Nicholas (2019). “Why infants may be more likely to die in America than Cuba,” New York Times, January 18.

[17] Olsen, Patricia R. (2009). “A banker for the world,” New York Times, August 22.

Copyright 2019 Gaurab Bhardwaj