Clicky

Friday, December 01, 2020

Instead of More, Try Different

You can’t out-compete others simply by doing more of whatever they do: going ever faster, cutting costs ever deeper, or working your people ever harder for longer hours. The Law of Diminishing Returns will ensure that. Besides, the Law of Unintended Consequences often turns such well-intentioned actions into surprising disasters. There is only one way to respond to competition that works long term.


In recent years, responding to competition has lost its way. Its has come to mean little more than doing more of what everyone else does. Time is money, so organizations continually try to go faster. Greater productivity and output per person is pursued simply by firing some people and working those who remain harder and for longer hours. Offering the customer discounts leads to a discounting price war. Tactics like this are ultimately futile, because they are a one-way street. Organization A cuts costs and is countered by organization B cutting even more costs. Working your staff for longer hours leads to others working their people for still longer ones. In time, such simplistic behavior crashes into the Law of Diminishing Returns—and often the Law of Unintended Consequences as well.

You cannot go on finding “savings” for ever from a finite set of resources. There is always a limit. And the closer you get to that limit, the less return you get for the same level of savings.
The Law of Diminishing Returns ensures that competition by means of cost cutting, staff reductions, overseas outsourcing, and the like will only work for a limited time. Once everyone is running headlong down this same track, additional cuts must swiftly become so deep that they start to harm the business itself. As the supposed “fat” is trimmed away, further cuts bite into muscle and bone, weakening the business’s longer term vitality—all for the sake of staying ahead in this short-term “arms race” of escalating cost reductions. We are already seeing rising wages and skill shortages in countries such as India, which were the first recipients of the outsourcing boom. That so-convenient surplus of skilled, English-speaking staff, who were willing to work for very small wages, has rapidly disappeared. The law of diminishing returns is always waiting to snatch away the prize, despite the effort put into winning it. All it takes is for everyone to jump onto the same “more profit by greater cost savings” or “more sales by bigger discounts” bandwagon—exactly what is happening today. You cannot go on finding “savings” for ever from a finite set of resources. There is always a limit. And the closer you get to that limit, the less return you get for the same level of savings.

That’s the Law of Unintended Consequences at work. Instead of getting what you want, you get something else—something logical and inevitable, but far less welcome.
The Law of Unintended Consequences can ruin you long before the Law of Diminishing Returns has its inevitable effects. Think about this carefully before before deciding there is no practical alternative to getting on to the bandwagon of imitation. Consider the discounts being offered to try to sell stockpiled cars and SUVs. Customers quickly get the idea that whatever “savings” one manufacturer offers must quickly be trumped by the rest. So they wait before buying—the very last thing the manufacturers want—to take advantage of the lowest possible price. Now the idea has spread. Bursts of holiday shopping are coming later and later, and retail price cuts and sales are starting earlier and earlier. What used to be post-Christmas sales to try to dispose of unsold goods have turned into pre-Christmas sales to try to sell anything at all. That’s the Law of Unintended Consequences at work. Instead of getting what you want, you get something else—something logical and inevitable, but far less welcome.

Here is another example. Through all the cutbacks, headcount reductions, and the like, organizations have (unintentionally, of course) been teaching their staff to be as disloyal to the organization as the organization has been to them. Many, many skilled people, especially in sough-after disciplines, keep their resumes polished and ready at all times. Quite a few have them permanently posted on Internet recruitment sites. You cannot blame them. They have seen their friends and colleagues thrown out without any scruple. Maybe they have themselves received pink slips, with all the cant about how sorry the organization is to have to let them go. Losing their job no longer terrifies them. They accept it as normal, and plan for it accordingly.

Organizations and their leaders have been engaged in a gigantic game of “chicken.” They have pushed one another further and further down the road of short-termism and pure expediency.
For years, organizations have relied on cutbacks and cost savings to drive up short-term profits and please shareholders. It is so much simpler and less demanding of leadership than increasing business—or creating more profitable and effective ways of doing the business that they have. When the Law of Diminishing Returns arrives to plague them, they still cut harder and harder to drive up profits faster than the competition are doing. Is it any wonder that the media are full of stories about looming shortages of skilled people? That too is simply the Law of Unintended Consequences coming into play. These “sudden” and “unexpected” skill shortages are merely the inevitable result of years of cutbacks in staffing and training. Now, so it seems, we may be facing a decades-long “war for talent.” With a huge rise in retirements ahead, as my generation (the “baby-boomers”) become too tired and ga-ga to go on working, our organizations are seeing red lights, huge potholes, and crash barriers along that nice road of easy profits from staff reductions.

Organizations and their leaders have been engaged in a gigantic game of “chicken.” They have pushed one another further and further down the road of short-termism and pure expediency. They have leapfrogged one another in their haste to become the “lowest cost producer,” seeking more and more “savings” in every budget—except the one for top executives’ salaries and bonuses. They have not dared to be the one who blinks first. In their arrogance and folly, they have challenged one another to stay longest on a path that can only lead to misery on a truly colossal scale, as the two laws (Diminishing Returns and Unintended Consequences) come down upon them. We have already seen the once mighty Ford Motor Company pawning virtually all its material assets to raise enough cash to stay alive. Who will be next?

There is another way: Doing more of the same can be replaced by doing something different. And “different” offers an almost infinite range of possibilities. One that is unlikely to run out in anyone’s lifetime.

Innovation is the only long-term source of genuine competitive advantage. Leave imitation to the also-rans, who don’t have the vision or imagination to do any better.
Here, at last, is a good use for all those tedious studies of “industry best practice.” Look at them carefully and take notes; this is what not to do, because it is already in use. This is what to avoid whenever you can. Don’t follow the herd. Think hard, be as creative as possible, and do something different. Strike out on your own. If what you do works, others will follow you, but (for a while) you will be out ahead with little or no serious competition. And when others do catch up, let them keep on down the road towards diminishing returns, while you repeat the process and step aside into something new.

Innovation is the only long-term source of genuine competitive advantage. Leave imitation to the also-rans, who don’t have the vision or imagination to do any better. Cherish your creativity. Hone and polish it every day. In the end, it is the only killer advantage that you will ever possess.

Add to Technorati Favorites Stumble Upon Toolbar

4 Comments:

David said...

This is an excellent point. I'm convinced that MBA's with no business experience and Lawyers will be the death of American Business. I've got a comment at cognitiveradio.blogspot.com

Dave

9:16 AM  
Carmine Coyote said...

Thanks, David.

Yes, I think there is a basic confusion between knowledge and understanding. Besides the concern that smartass lawyers make most of their money out of other peoples' misfortunes.

Keep reading, my friend.

2:13 PM  
Tanny said...

The problem is even more acute for smaller sized businesses who find it easier to fall in line with the rest especially when it comes to business practices. The retail trends mentioned are evident not only in America but also in Australia and Asia

2:04 PM  
Carmine Coyote said...

You are right, Tanny. But just about all businesses find it easier to fall in line — unless they are quite determined.

That's why there are so many mediocre businesses.

Keep reading, my friend.

3:45 PM  

Post a Comment

<< Home

Creative Commons License
This work is licensed under a  Creative Commons Attribution-NonCommercial-NoDerivs 2.5 License.