How ambiguity can serve atypical organizations

Is it better to stand out or fit in? It's a critical question for businesses. Recent research by Assistant Professor of Management and Entrepreneurship Heewon Chae shows how being different can be a competitive advantage.

Is it better to stand out or fit in? It’s a question we face all our lives, from our first day of school through our entire professional careers. It’s also a critical question for businesses of virtually every ilk as they approach their audiences. The conventional wisdom among organizational theorists seems to match the instinct of most kids, which is that belonging is a better bet for success than being different. But recent research by Assistant Professor of Management and Entrepreneurship Heewon Chae suggests that it’s not quite so black and white. In fact, the ambiguity created by atypical organizations — the fact that they don’t fit in — can sometimes cause evaluators to be less critically objective of their performance, providing an advantage for which conforming organizations miss out.

The disadvantage of difference

“There is a lot of research about whether atypicality is good or bad,” says Chae. “Overall, the conclusion seems to be mostly negative.” She explains the idea that atypical organizations are at an innate disadvantage is founded on the assumption that by differing from others in their category, they render themselves confusing to various important audiences including potential investors, employees, customers, and partners. A corollary to this argument is that atypicality further hurts by creating the perception that the organization is in some sense less credible and less legitimate than its more typical counterparts.

On one level, this is just common sense. If you walk into a bank and it looks like a bagel shop, you’re likely to turn right back around and look for something, well, more like a bank. On the other hand, if all the banks in the world look just like one another, how can they stand out and win more attention and support? Where is the line between benefit and harm when it comes to nonconformance?

Startups can benefit from enhanced performance evaluation. If they are evaluated like typical organizations, they may starve. But if investors are committed to them, and perceive them as atypical, or disruptive, they’ll be more likely to back them through the difficult early stages.

It’s questions like these that have motivated Chae to challenge assumptions about atypical organizations by examining ways they may gain advantages over their more typical counterparts. In a recently published study in Organization Science, “The Effect of Organizational Atypicality on Reference Selection and Performance Evaluation,” Chae and her co-author, Edward Bishop Smith at the Kellogg School of Management, sought to engage with these issues by zeroing in on how we tend to evaluate atypical organizations.

Gaining the benefit of the doubt

Chae and Smith focused on investment behavior in hedge funds and studied not just which type of fund was chosen, but also how people arrived at their determinations. “Typically, when assessing an organization such as a hedge fund, people will measure it against a reference group, like a hedge fund index,” Chae says. “Reference group selection has been assumed to be stable and objective, but we found out it isn’t. The ambiguity of atypical organizations can provide investors with the flexibility to choose their own reference group.”

This can play out in favor of the non-conforming funds because when investors are committed, they resist assessing atypical organizations against typical standards. The study found that driven by the sense that it’s not an “apples to apples” comparison, investors sometimes avoided using the standard referent. This allowed them to be more forgiving of poor performance and more rewarding of good performance than investors in typical funds.

Chae explains this phenomenon in the everyday terms of selecting a restaurant for dinner.

“Let’s say you want to go out to eat and choose a standard Italian restaurant, but the food sucks,” Chae says. “It’s tough to justify it, even if you want to be right about your choice, because it’s so standard. But if the food is unusual, you might be less likely to compare it to standard Italian food, and even if it’s not good, give it a pass.”

Good news for startups

Chae points out that this dynamic, known as enhanced performance evaluation, can play out in many ways in the business world. One clear beneficiary may be startups, which tend to be atypical by nature because they are new and unfamiliar. “Startups can benefit from enhanced performance evaluation,” she says. “If they are evaluated like typical organizations, they may starve. But if investors are committed to them, and perceive them as atypical, or disruptive, they’ll be more likely to back them through the difficult early stages.”

One key, according to this research, is that investors must have the freedom to gather their own reference groupings. When investors weren’t given any indexes against which to evaluate an atypical fund, they tended to not extend to it the same forgiving attitude. As Chae puts it: “They may have had the will to enhance the evaluation, but they didn’t have the way.”

The study also found that this enhanced evaluation was most evident when the atypical fund’s performance was either particularly weak or strong. Apparently, middle-of-the-road performance didn’t get the same kind of favorable evaluation. This may further support the “go for broke” startup mentality. If you want investors to give you the benefit of the doubt, this finding suggests, be great or be horrible. Just don’t be mediocre.