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Mitt Romney and the Expertise Fallacy

November 19th, 2008 by David Kronemyer · 5 Comments

In an Op-Ed piece in today’s New York Times former presidential candidate Mitt Romney weighed in with his views regarding Detroit’s request for loan guarantees. While I think Mr. Romney basically is an idiot, I have to say his views on this point are well-considered. Detroit has no more entitlement to a bailout than any other American industry.

That being so Mr. Romney succumbed to what I will call the “expertise fallacy.” He stated: “management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.”

I have been through this issue a dozen times in the entertainment industry. For example, Chrysalis Records recruited Joe Kiener, a tennis shoe executive. Angel Records recruited Steve Murphy, a book publishing executive. EMI Music recruited Terri Santisi, who for all I know now is preparing tax returns at H. & R. Block. As adept as they may have been in their respective fields, none of these executives had the slightest idea of what they were doing in the record business.

I’ll never forget a record company convention I was at in Palm Springs, California.  At the time Chrysalis Records had a big hit with Sinead O’Connor’s cover of the Prince song “Nothing Compares 2 U.”  Kiener and I were talking and he says, “I’m busy planning her 4th single” (i.e., the one that was to be the fourth one after “Nothing Compares 2 U”).  I said, “Joe, shouldn’t you be worrying about her next single first?”  I liked Kiener and thought he was a nice guy, but he didn’t understand a word of what I was saying.  Shortly afterwords O’Connor shaved her head and started insulting Pope John Paul II, which was the end of her major label career.  God knows how much marketing money Kiener spent on this quixotic notion.

The premise underlying the expertise fallacy is that there are two separate knowledge bases. One pertains to the “industry” and the other pertains to a substantive field of endeavor, for example, “finance” or “marketing.” Companies delude themselves into believing the latter trumps the former and that people from other unrelated enterprises must know something they don’t.

This isn’t how the phenomenology of expertise works. As analyzed by experts such as Hubert Dreyfus, it is a series of steps to acclimatize oneself to the nuances and dynamics of a particular firm, how it is situated in the marketplace, and the product handling characteristics of what it has for sale. Every industry has its own specialized and non-fungible set of customs, conventions and protocols. Strategies that may work for consumer products companies such as Procter & Gamble have little in common with the nuances required to originate, market, promote and distribute records or movies. It only is coincidental these terms even are used interchangeably when in fact they have completely different meanings.

I make this observation ecumenically. While I am not aware of specific examples, I am sure record or film industry executives would not be very good at selling underarm deodorant.

One of the main differences between consumer entertainment software (CDs, DVDs, video games, etc.) and other types of consumer products (laundry detergent, groceries, etc.) is the economics of replication. Consumer entertainment software is inexpensive to duplicate (and has become even less so with the increasing obsolescence of physical goods). The only investment required is to originate it (e.g. recording costs for a record, the negative cost for a film). This cost in turn is amortizable over the number of units sold. As it is recouped, its per-unit cost becomes increasingly small (and one of the key measures of a project’s success is the rate of this recoupment).

Consumer product companies, on the other hand, incur very little in the way of fixed cost. And, their marginal per-unit cost always will be higher because they are selling a physical thing. This leads to completely different product life cycles, handling strategies and marketing campaigns. The ways in which these are structured will depend more on the particular industry than on some set of general theoretical principles.

Automobile companies have plenty of reasons to be insecure right now. There is no reason to suspect, however, that executives from some outside industry will be any smarter than the present incumbents. In fact they most likely will be less successful because they don’t know a thing about making or selling cars. In appealing to the alleged “expertise” of industry outsiders, Mr. Romney is making a significant conceptual error.