Posted on 10/22/2006 8:08:39 AM PDT by grey_whiskers
In my previous article, I pointed out that it is sometimes worth it to allow cost inefficiencies, in order to be sure of reaching the largest customer base. (Other times, of course, inattention to cost can be disastrous—remember those $600 ashtrays procured by the US military during the Cold War?) The tug-of-war between efficiency and time is a continuous balancing act. By looking more closely at the balancing act, and making analogies, I think it is also possible to gain insights into overall strategy.
Have you ever watched a flock of geese heading South for the winter? If you have, you will remember the way geese fly—always in that V-shape, honking their merry way along. (And in an analogy to business, dropping little “surprise packages” from above as they go by.)
So meeting the needs of the customer base is more important than just meeting the needs of one customer. And trying to do this can become something of a balancing act—sometimes requiring attention to cost first, and other times requiring the time, money, and effort to get things “just right”. Think of a flight of geese honking as they fly south for the winter. The geese don’t bother having a squad leader flying alongside them to make sure everything is aligned; they just follow two rules: stay behind your wingmate, and fly just behind them. And the entire formation is maintained.
Similarly in business, management is governed by two golden rules:
Increase revenue, and decrease costs. Now, there are several ways of increasing revenue. One of them is to sell more of your product or service. And there are several ways to accomplish that. One of them is to hold a sale—if people buy enough more of your product, you can make up the lower price on increased volume. Another way is to hold a successful advertising campaign, so more people are buying your product at the original price. A third way (used most often in the auto industry) is to use deceptive tactics to jack up the price on your buyers. And then you can either invent new products, or take your existing product to new markets (“Announcing the Grand Opening of our new Downtown Location!”) And of course, the last way is to cheat and just lie about the numbers.
And there are also several ways of decreasing costs. First, you can produce less product. (Think of seasonal shutdowns at some auto manufacturers.) Another way is to lay off people and to force the existing staff to work harder. Yet another way is to decrease capital expenditures (move to a less fancy headquarters). Or you can pay your workers less money (it’s funny how workers are outsourced to save money, but never managers, by the way). And of course, another way is simply to invest less time and effort in your product, and produce cheap crap.
And the profit structure is maintained. Unfortunately, the analogy kind of breaks down here, for two *more* reasons. First, people are not quite as stupid as geese, and they want either reward, recognition, or prestige for all their sacrifice of time and money. Secondly, most businesses are trying to do something more difficult than just fly south through a clear sky. They are trying to create a product of service, let people know about the service, haggle over price, arrange delivery, and collect the money. While also performing similar tasks (from the other side) towards their supplies; and also while (if they are any good) taking advantage of new markets or new technologies.
The problem with running a business—let me rephrase that. The problem with running a business well (anybody can run a business into the ground) is that *unlike* the geese, the environment is more demanding than just flying due South in a clear sky. You have the problem of changing consumer taste; you have the problem of changing technology (both as an aid to running your business, and as a threat to your product or service); you have the problem of finding a price point to maximize profit (or of deciding to remain a niche player); you have the problem of solving and repairing bottlenecks; and on and on. What this means, is that it is not enough to say “cut costs” or “manage for growth”. If you are out of step with the larger environment – say, if you were an airline who bought 20 new jumbo jets on Sept. 10, 2001 – you can quickly go OUT of business.
Keeping a handle on all of these items at the same time is not an easy task. And it is supposedly for this reason that managers and executives are paid so many boatloads of cash. As the thinking goes, “We have to pay top dollar to attract talented executives who know our space.” But this leaves several things out. Oftentimes, a company will pull in an executive from another industry entirely, because “they don’t know what can’t be done.” Well, in that case, why insist on a prior executive? Or, what about the case of pampered airheads like Carly Fiorina? She was rewarded for running Lucent into the ground by being given control of Hewlett-Packard. And after forcing a merger with Compaq, and destroying the company’s reputation with customers (by cutting both product quality AND customer service at the same time), she was rewarded with a seven-figure severance package. I have had a number of techies say to me, “I could have ruined HP for a lot less money than she cost.”
So why is it that companies go the way they do? Even when it doesn’t make sense? I suggest we go back to the geese. If we allowed every single one of the geese to have input on which direction the flock was headed, (“flock by committee”) I think we’d see a lot of those flights going in circles, or back and forth. And that would guarantee failure. And in the meantime, we could stand to learn one more thing from the geese. They may follow the leader, but they don’t look for the leader to issue self-serving press releases. They dismiss it as so much honking, and get on with the task at hand. We would be well served to do the same.
Wow, 3 HONKS! Greatly enjoyed reading this, and kudos for the witty headine.
“I could have ruined HP for a lot less money than she cost.” LOL
Now waiting for the next chapter of your book on how to solve these problems, with examples and case sutdies!
BTTT
(Gee was that confusing enough?)
Thanks for the compliment...
Cheers!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.