Experience Curve

@RogerBohn complains that The Economist praises a dangerous and obsolete management concept - namely the experience curve or learning curve.

The theory of learning-by-doing was introduced by economists to explain the macroeconomic observation that productivity typically increased during an extended period in which the production processes and technologies remained the same. The theory suggests that these productivity improvements can be related to cumulative production volumes. Economists use the theory to predict that aggregate productivity levels will increase under certain circumstances. However, management consultants have generally used the theory at a microeconomic level, apparently believing that it predicts productivity improvements in specific production units, and that (as Bohn complains) "improvement is inevitable and the same for everyone in an industry".

Bohn points out how productivity in the car manufacturing appears to run entirely counter to the microeconomic interpretation of learning-by-doing. Productivity at Toyota improved far faster than at General Motors, even at a time when it produced (and had cumulatively produced) far fewer cars than GM.

Now here's the twist that may save the theory. Toyota's competitive advantage was in JIT and “The Toyota Production Process,” which Bohn describes as "a system for making more rapid improvement". So Toyota core process wasn't manufacturing-cars, it was improving-manufacturing-cars. Toyota was making improvements at a staggering rate, which left its competitors standing. It's more difficult to count improvements than to count cars (because improvements can be understood in different ways), but it is not hard to believe that Toyota's cumulative number of improvements has been higher than that of GM for a long time now. If we reframe the production system in this way, perhaps the theory of learning-by-doing could apply to this example after all.

But this interpretation of the theory of learning-by-doing is quite different from the conventional interpretation, and would make its use as a predictive tool or as a consultancy tool much more problematic.

Whole Foods

Two contrasting descriptions of the same organization crossed my desktop today.

• Leah describing WholeFoods as an anarchist organization (The Business Anarchist Is The New Entrepreneur via Tom Graves).

• Bruce Schneier describing WholeFoods as a petty-minded legalistic organization (Perverse Security Incentives).

Can these two apparently conflicting descriptions be reconciled? What other descriptions can you find? Do these apparent contradictions represent superficial differences or deep divisions?

From Espresso to Instant

Starbucks is changing its business model. Or as CEO Howard Schultz tells the Huffington Post, Staying Real in an Instant. Starbucks will be selling shots of instant coffee, for under a dollar a cup. The UK price is said to be around 60p.

Some people may have thought that "espresso" was the Italian word word for speed. (It isn't - it means "pressed".) So what could be faster than express coffee? Instant coffee!

Of course the word "instant" isn't about getting the coffee more quickly either, it is about doing away with all that fancy machinery, in whose use Starbucks makes such a charade of training its baristas. (A year ago, Schultz ordered all US stores to close for a three-hour training session "as part of an effort to improve coffee quality and revive the chain's flagging fortunes" [Guardian, 26 Feb 2008].)

Shultz now claims to be responding to the increasing mobility of consumers. "Imagine a cup of Starbucks VIA Ready Brew on a mountaintop" he says, as if willing us to imagine millions of Starbucks customers on some remote and implausible trek.

But clearly his real interest is selling mass market coffee. He hopes that the Starbucks instant coffee will be not only better-tasting but also "paradigm-changing" (whatever that means), and hopes "to turn on a whole new set of coffee drinkers to the Starbucks brand". But the obvious risk is that the old set will be turned off. He acknowledges that this move is a gamble (he calls it "a considered bet"), and expects "to learn a lot ... over the coming weeks". You bet.

In what sense does this count as a new business model? Starbucks already sells ground coffee and coffee beans in supermarkets across the USA. Many rival coffee purveyors have already shifted to the Gillette model, in which the coffee machines are sold cheap or practically given away, and you make your money selling overpriced pods of coffee.

The challenge faced by Starbucks is not choosing one business model, but attempting to combine two or three different (and possibly incompatible) business models at the same time. Such composition faces questions of cross-subsidy, brand dilution or erosion. Are there any reliable rules or patterns governing the interoperability (compatibility and composition) of business models?

See also

• Starbucks to Combat Brand Erosion with Loyalty Program (Marketing Vox, March 2008)
• Starbucks: How Growth Destroyed Brand Value (Business Week, July 2008)

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cross-posted to SOA blog

Lecture Notes - Foundations of Business

Our lecture notes have long been available in PDF form, but I have now loaded some of the lectures into SlideShare for easier access.

| Get your Presentation Pack

Entrenched CEO 2.0

In The Perils of Having a Passionate Helmsman (Financial Times, 20 November 2008), John Gapper explains what was wrong with Jerry Yang as CEO of Yahoo.

"What he thought was right for Yahoo turned out not to be, and his passion for the enterprise he built, which he thought could flourish independently, was misguided. Sometimes, what a company requires is not a passionate leader but a dispassionate one."

The traditional pattern of the entrenched CEO was an indolent and complacent executive, who built himself mansions at the company's expense (or selling his stock to fund an expensive lifestyle), and spent more time playing golf and schmoozing with politicians than running the company. A recent study suggested this was a strong signal for investors to sell.

"Liu and Yermack discovered important correlations with future company stock performance: The larger and more costly the home, the worse the stock performance. Also, when a CEO liquidates company shares or options to finance a home purchase, even if the sale represents a small share of the CEO's total holdings, it bodes poorly for future company performance." [Knowledge@W.P Carey, May 2007. See also Michael Brush, CEO Mansions, A Stock Indicator (MSN Money, April 2007)]

Yang certainly doesn't fit that pattern. But all the same, the company didn't get rid of him until it was too late. See my post Yahoo Endgame?

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Further Reading

Roman Inderst & Holger M. Mueller, Keeping the Board in the Dark: CEO Compensation and Entrenchment (April 2005, pdf)

Company Size

Microsoft CEO Steve Ballmer thinks company size is a matter of perception.

"How do you know you're a big company? Answer: When everybody thinks you are. You're a small company when everybody thinks you are, including your employees. You're kind of an emerging company when everybody thinks you are. You're a larger company when everybody thinks you are."

This has implications for HR strategy, as Ballmer eloquently explains.

"We hadn't renewed our employee value proposition, if you will, since we became a big company. ... Clearly something happened between 1999 and 2003. We went from being whatever we were to being viewed as a very big company, because governments and everybody else said these guys are a very big company. And then you have to say, O.K., if that's the perception, then you have to have a value proposition that's appropriate. And not only had we not renewed our value proposition, we had tried to make small tweaks in some of the trappings and form around that value proposition that were sort of inconsistent with where it was and where it needed to go."

Source: Reshaping Microsoft's HR Agenda (BusinessWeek, Sept 10th 2007) via The Secret Diary of Steve Ballmer

A Time To Act 2

Delaying a decision may simply involve holding out for a better offer. For example, when the directors of a company reject a take-over bid, claiming (as they always do) that it significantly undervalues the company.

It would be wrong to take the first offer that is made, if there is a reasonable chance of holding out for more. But on the other hand, if you wait too long for a higher offer, you may lose out.

In a post entitled Logic Need Not Apply, Microsoft employee John Evdemon comments on the refusal of Yahoo directors to accept a take-over bid from Microsoft. Is this simple greed, he asks, or are the Yahoo directors allowing their emotions to rule their heads? In asking this question, John is not just influenced by his current affiliation with Microsoft, but also with a startup company he was involved with previously, whose directors turned down a high offer and were subsequently forced to accept a much lower offer.

According to the New York Post (via Computerworld, Feb 15th 2008), there is a split in the Yahoo board, with some directors advocating acceptance. There is a threat of shareholder lawsuits if the directors could be proved to have acted emotionally, rather than in the best interests of shareholders. But how could this ever be proved?

A Time To Act

After several months in which alternative solutions to the Northern Rock crisis were explored, the UK government has finally decided to take the Northern Rock "bank" into temporary public ownership. [BBC News, February 17th, 2008]

The delay provides easy ammunition for political opponents.

"After months of dither and delay we have ended up with this catastrophic decision," said George Osborne ( Conservative shadow chancellor).

Liberal Democrat treasury spokesman Vince Cable said that the right decision had been taken, though "belatedly", and that the government should have walked away from the prospect of a private takeover some time ago.

For their part, government ministers argue that it was necessary to explore other options, and provide the private sector a reasonable chance to offer an acceptable solution, before taking this step. Among other things, the thoroughness of this exploration would provide some defence against any likely legal challenge by Northern Rock shareholders.

As I have previously pointed out on this blog (decision-making, time), timing is an important aspect of decision-making. In this case, it is possible to debate not only whether the decision was the correct one, but also whether the decision could or should have been made earlier - or even later.

According to our model of decision-making (based loosely on Lacan), there are three phases in a decision.

1. The instant of seeing - the moment it was recognized that Northern Rock was in trouble
2. The time for understanding - a period of reflection, negotiation, allowing time for collaborative solutions to emerge
3. The moment of concluding - the point at which all the available options are understood, and a choice must be made.

All of these are uncertain. When exactly was the instant of seeing - when the first rumours of trouble reached the Bank of England, or when the customers started queuing outside the branches to withdraw their savings? How long is it reasonable to wait for a solution to appear? At what point must analysis and negotiation be cut short? Might we have found a better solution if we had spent longer searching?

It is easy to rival politicians to claim that the Government (or any other decision-maker) got the timing wrong, and to make wild and imprecise claims about their own super-human decision-making prowess: "Oh, we'd have acted straightaway" (whatever that means). We live in a culture that values speed and instant response, and is impatient of slow deliberation.

I don't actually know whether this particular decision was taken at the best possible time, and I guess you probably don't know that either. Just look out for statements about how quickly or slowly a given decision ought to be made, and see how these statements are underpinned not by reasoning but by instinct. Which means that if other people act faster or slower than you think they should, this doesn't necessarily mean they are stupid, it may simply mean they have different instincts.