Overcoming tragedy ‘wherever you find it’

6/24/2012 - Within tragedy lies opportunity — to gain wisdom and courage and to advance the common good.

In a final session for graduating Kellogg students and their guests on June 15, Professor David Besanko presented a series of cases studies illustrating the tragic events that can befall businesses, markets and society.

It might have seemed a sad topic for graduation day, but the message of the lecture was quite the opposite — in fact, uplifting.

“Tragedy is not inevitable,” Besanko, the Alvin J. Huss Distinguished Professor of Management and Strategy, told a packed audience in the Owen L. Coon Forum. “It can be overcome.”

Tragedy of the commons
Besanko’s first case addressed the collapse of the North Atlantic codfishing industry in the 1990s. Driven by self-interest without regard to the long-term benefit for all, North American firms thoroughly overfished and depleted a common resource.

Besanko used this textbook example of the “tragedy of the commons” to highlight the struggle between individual and collective interests. He counseled students to be cognizant of how they will help align private interests with communal welfare in real-life ways. Working together for the common good in any organization requires the ability to build esprit among members to achieve shared goals, he said.

Tragedy of the race between greed and fear
How did Bernie Madoff’s Ponzi scheme snooker highly sophisticated investors? Posing this question, Besanko theorized that the tragedy of the race between greed and fear kept investors engaged despite obvious red flags.

“Maybe the returns were so high, investors felt it was better to stay in a little bit longer,” mused Besanko. The real tragedy, he said, was that they may have kept the scheme alive longer than necessary.

Pointing to the broad lessons gleaned from the Madoff case, Besanko advised students to look for disconfirming evidence and to be skeptical of the herd. “If it seems too good to be true, then it probably isn’t,” he said.

Tragedy of competitive escalation
For the first time, satellite radio’s Sirius XM — the result of a merger between Sirius and XM in 2008 — achieved a positive net income in 2011. But before they became one, the two firms fought for market leadership from 2002 to 2007, incurring combined losses of $11.6 billion.

This final case study showcased a market that eroded shareholder value. Besanko blamed the tragedy of competitive escalation for creating a winner-take-all environment.

The main lesson here is that “you shouldn’t play this game at all,” Besanko said. Successful organizations avoid trench warfare. They strive for autonomy by creating a distinctive mix of value and having the courage to go their own way, according to Besanko.

Besanko concluded the lecture by congratulating the Class of 2012. “The good news,” he said, is that the graduates will emerge from Kellogg “with the skill sets, judgment and courage to overcome tragedy wherever you find it.”