Dear Friends,
It seems to me that most people in business have no idea what business is about. They are utterly ignorant of how business works. Business is about getting the customer to love your product, good, or service. It is that simple. Not maximizing revenue or making a good IPO it is about the customer. This fundamental fact seems to be lost on most people in business today. Netflix anyone?
When a firm does a good job at a reasonable price that firm is profitable. It is when a firm seeks profit ahead of customer satisfaction that firms go wrong. When You or I, am satisfied with a product, I know I continue to use that product, you probably do too. In complexity theory it is called, explore or exploit. Once a satisfactory good has been found that fills a need or want then the most profitable choice is exploitation. It less profitable to explore as more satisfactory products come into our understanding. In this context, when a firm provides that satisfactory product, then that firm gets the business.
Making a product that works, for the use it is sold for, is so important that you would think it wouldn’t need to be mentioned… But, alas, it must be. How many times have you bought a tool or item that broke immediately? Not only did it break but any one you bought would break in the same way? I bought a garden weasel once. The handle was made of luan. Seriously, it was made of luan, the wood from the Philippines they make the sheet board from. It broke immediately into a very sharp stake. I then tried to use the dangerously sharp, and much shortened handle, and it broke again! The ultra low quality handle made the rest of the product useless. No matter the quality.
A product that is ill suited by design or material usage does not build brand loyalty. It does however generate revenue. If an unsuitable handle for an implement can be purchased for 10% of the cost of a suitable one, the 90% that I save, can go into management’s pocket, as a bonus, for the short term profit. The long term consequences will be born by the stock holders of the company, who, by the way, didn’t get a dividend payment for the short term revenue enhancement, (or have any say in the decision about the handle).
What we have here is the principle agent dilemma. The principles being stockholders of the various companies and the agents being the managers of those companies. Corporate America has become the poster child for the principle agent dilemma… in action. The giant salaries of idolized CEOs are only one small example that is plainly obvious. More pernicious examples are when, Americans eschew American products, because of a perceived quality deficiency. Defects often totally due to engineering or not meeting jobbing specs.
As in the case of the garden weasel the casting and assembly was done in America but the handle was made in, I’m guessing, the Philippines. The quality of the American made part was perfectly acceptable, (from how it appears unused), but the dangerously unsafe foreign part gave the perception of low quality. Here we have a problem with management that let this go out the door. The workers who made the metal parts did a fine job. But are probably now out of work because of the dangerously unsafe handles.
Structural economic malfeasance is what the principle agent dilemma in American boardrooms, as well as some European ones, have become. Structural in that it is endemic and unpunished, it is a form of malfeasance in that it is utterly cupidity and it effects the economies of the various countries that have this as a problem, by lowering GDP growth… Which magnifies the negative economic effects over time.
What is the source of this corruption? I would argue the source is the corruption we see in government. Congressmen and women engaging in legal insider trading, with no consequences, a vice president admitting he broke the law but without an “overriding legal authority” he was in the clear, Cold cash, banking scandal, House post office scandal, Nancy Pelosi’s jumbo jet while she was Speaker, the list is endless. Confucius said, leaders lead and the people follow. If the leaders want a more human hearted people the leaders must be more human hearted themselves and the people will follow… Pretty sage advice from a sage… Too bad it’s not followed.
Sincerely,
John
