Monday, March 30, 2015

The Value of Values

Companies that have built lasting reputations have done so on various foundations: they may have excellent products or services, iconic brands, unique experiences, or reputable management.   These foundations can be maintained though financial struggles and can even carry companies through scandal.

By contrast, companies that choose financial performance may be well regarded, but their reputation is tied only to their returns, and when those fail, the company is abandoned.   Witness the respect granted to technology and financial firms during the booming 1990’s, and how quickly that respect evaporated after many of the innovators went bust.

When a company’s financial performance takes a downturn, as happens to every firm at times, the mediocre economic performance is cause for criticism, but the critics do not stop there.   Once a company is in doubt, people begin to question its reputation, good judgment, and ethical behavior.  Audits and financial investigations expose incidents of poor risk management, irresponsible investment, negligence, and stunning incompetence.   The scandals mount, and people flee the firm: customers, investors, partners, and employees do not wish to be associated with the firm and cease to interact with it.

This is often done with great melodrama because public opinion favors the extremes: hero or villain, with no middle ground.  A single scandal may be aggrandized to portray a firm as a villain, or dismissed as a minor misstep of an otherwise heroic firm.   It may seem superficial, but it is not inconsequential: people choose to buy from, work for, and invest in one firm or another based on reputation.  A good reputation can sustain a firm, a bad one can sink it.

Negative public image can lead some firms to atone and change their ways, but many are (rightly) skeptical that it is a temporary measure.  A scandal might compel a firm to apologize and take actions to appear more ethical and socially responsible, but this is often short-lived and, as soon as the economic conditions improve or the spotlight of public attention moves elsewhere, it’s back to business as usual.  

A firm may change its behaviors, but not its values: if a business leader places primary value on profit maximization and is skeptical about ethics, he may do what is necessary to appear to be ethical without actually becoming ethical, so long as it seems to contribute to profitability.   Ultimately, values will drive behaviors, and if the values of a person or group of people are deficient, they will not and cannot long maintain a fa├žade of ethics.

Society’s expectations of a firm evolve over time.   During the industrial revolution, firms were seen as the means to achieve economic goals – wealth and prosperity for its investors.   In the twentieth century, this perspective shifted to consider the firm as a necessity to the livelihood of the people who worked for it – the wealth and prosperity of its employees.   The fall of socialist regimes in the late twentieth century confirmed the superior efficiency or the market economy and the role of private enterprise in not only creating wealth, but in achieving social progress. Naturally, this led to the assumption that the former method had been the correct one, and the consequences have been unsatisfactory: a strong of economic crises, each worse than the previous one.

As such, it is necessary not merely to return to the old perspective, but to question: what is the purpose of a company?   Is it merely to profit its investors?  Is it merely to profit its employees?

The first purpose of any business is to deliver value to its customers – it is the method of its survival as an organization.   A company succeeds only by creating a product or service that they are willing to buy – it is financially sustained only if it is continuously successful in serving that purpose.   The ethical dimensions of a firm must therefore be derived from that purpose.

There is also the notion that companies exist within a society: everyone who interacts with a firm is part of a society, which has a culture and shared values.  The firm cannot stand aloof of these values. In terms of economics, a firm survives or fails because its purpose and values are aligned with those of a society.    If it makes a product that delivers adequate value for the price demanded, and does so in a manner that does not destroy more value than it creates, it survives.   If it does so more effectively or efficiently than its competitors, it succeeds.

As such, a company must be remarkable for its success in its mission, not merely short-term financial performance.   Its reputation is an amalgam of what other people think of it, and each group of people have their own ideas about the qualities a firm must demonstrate.  Shareholders, customers, employees, partners, competitors, regulators, and society at large each have different values that are sometimes in conflict.   To persevere, the business must pursue the values that are most critical to its survival and its success.

Wednesday, March 25, 2015

Outthink the Competition

I recently read Krippendorff’s book, Outthink the Competition, which largely contrasts two approaches to gaining competitive advantage: the first approach is to do the same thing as everyone else more efficiently; the second is to do something different than everyone else that is more effective.

While this book champions the second approach, it does not entirely invalidate the first: there is a great deal of room for improvement in the efficiency of existing business processes, and only few categories in which there exists a champion who has so perfected every process that it seems impossible to challenge.  However, not much needs to be said about this approach as it is the one that is most often taught in business schools and most often attempted in the field, to the virtual abandonment of innovation.

Particularly for smaller firms entering established fields, competing on efficiency or economies of scale is simply not an option.   While it is not entirely impossible, it would be highly impractical for a small firm with an unknown brand to take on Walmart or Macdonald’s and attempt to beat them at their own game: these firms are already established, have massive economies of scale, and a long head-start in developing efficient processes for their operations.  So rather than attacking the giants by fighting in their field, using the tactics they invented, and accepting their rules, a smaller firm must find a different approach.

All of this is easier said than done, and Krippendorff comes up short on the details in many instances, but the basic theorem is sound: recognize that practices have become standardized, find an option that others ignore, implement it quickly, and do whatever you can to prevent your competition from copying you.

What’s lacking in all of this, which the reader is left to consider on his own, is the evaluation of this “different” way of doing things.   Not all new ideas are good ideas, and simply deviating from standard practices does not create competitive advantage unless the different approach is superior in some way that customers value.   So I regard this book as a rallying cry, but a great deal more market-specific and industry-specific research is necessary to put the author's advice to good use.

Friday, March 20, 2015

The Ultimate Goal of Production

Actions are undertaken to get results, by whatever word they may be called (goals, ends, aims, objectives, etc.).  And strictly speaking, the goal of any action always involves the relief from uneasiness (whether we are seeking to react to a problem or pursue something that would make us contented is incidental - we are less happy than we would like to be).

Actions are also limited by the means to act - the resources and capabilities that are available to be employed in pursuit of any goal.  The world is filled with "things" that serve no purpose until they are needed, but are maintained in case a need for them should arise.   In economic terms, it is the potential of a thing to serve as the means to accomplish a goal that causes it to have value.

However, there is no objective standard of value.   To suggest that a thing has a value is to suppose the value of the end to which it serves as a means.  The value is not the same for all, but is determined by each person's subjective assessment, which is based more on belief than upon fact.  The value of a transaction is the coincidence of the subjective assessments of buyer and seller, and there is no external means of declaring an arbitrary price to be fair to all.

It is unfortunate that it has become customary in economics to refer to physical things as "goods" as the "good" that they do pertains to service to a need in which they are merely the means.   That is, improvement of the conditions of human welfare is a good, thing such as food and clothing are the means by which that end is achieved.

There is also the chain of production by which a good delivers the outcome.   We recognize that a consumer good succeeds or doing so (a coat provides warmth to the consumer) but often overlook that the chain of production (raising sheep, shearing wool, spinning thread, weaving cloth, cutting a coat) are all incremental steps by which a means is fashioned to be serviceable to its ultimate end.

And so it follows that the ultimate end determines the value of the means: how much a coat is worth depends on the value of warmth to the consumer.  The cost of providing a coat is apportioned among the various producers of material along the way, each according to the part they play in the production of the consumer good, and the total amount shared among the cooperating parties cannot be greater than the ultimate value to the consumer.  Although it must be considered that while it is possible for one firm to take a loss to improve the profit of others, this is not sustainable practice.

An economic good is not necessarily embodied in a tangible thing, as the goals of the consumer may be met by services provided by others - it is merely in the arrangement of labor and materials that makes it seem otherwise.  Whether a customer purchases a ready-made coat from a tailor or merely pays the tailor to sew cloth the customer provides to him, the goal is the same.

Monday, March 16, 2015

Flexibility Earns Loyalty

A company that wishes to have loyal customers must establish long-term trusting relationships with them by demonstrating (not merely claiming) an interest in serving their needs.  This is most clearly demonstrated when a firm is willing to deviate from standard operating procedure to help customers in unusual situations, even if it is contrary to the firm’s short-term financial interests – and in return customers are willing to continue to do business with those firms even when it is not in their own short-term financial interests.

Consider that “brand equity” is the extra amount of money a customer will be willing to pay for a product of a specific brand, as opposed to a generic product that satisfies the same needs.   The difference in cost is, in a very real way, the financial sacrifice that a customer is making in order to maintain a relationship with the brand.   And they expect reciprocation.

Consider Nordstrom’s chain of department stores and the stellar reputation they have for customer service.  In particular, there are a multitude of legends about its liberal returns policy: refunding without a receipt, even for merchandise the firm doesn’t sell, being willing to take back an item of clothing that the customer has worn but no longer fits.     Many other stores have rigorous returns policies and seem to assume that the customer is cheating them, but being willing to give trust to customers earns Nordstrom’s trust (and loyalty) in return.

Companies with an eye toward efficiency gravitate toward practices that deliver the least value for the most amount of money, which is diametrically opposite to what the customer demands of a vendor.  Those that seek to have impersonal transactions find that they are considered to be impersonal.   The “tit for tat” rule of exchanges, giving and receiving in equal value, is meeting the customer’s minimum expectation – it is not grounds for loyalty.

Friendships and other human relations involve exchange, but it is not specific, exact, or immediate.   Loan a neighbor a cup of sugar and she will return to you some of the cookies she baked, rather than a cup of sugar.   Imagine how awkward it would be to pick up the tab for lunch one day and the next time you dine together the colleague insists he buy you a lunch of the exact same value, to the penny, or settle the difference in cash.   Or even a friend who needs the loan of a trifling amount of money insists on a repayment schedule and an exact rate of interest.    These relationships involve give-and-take, such that precise accounting is not only unnecessary but inappropriate.

Granted, the commercial world involves money and accounting, and a business cannot sustain itself on the vague notion of offering “some” product for “some” money to be paid at “some” date.   They have their own suppliers and employees who expect to be compensated regularly and in specific amounts, and the business must manage its cash flows in order to remain solvent – so people expect there to be more specificity in their relationships with companies.   But the more flexibility that a firm shows in ensuring the customer gets the value he intended from his purchase, the greater satisfaction and loyalty.

Tuesday, March 10, 2015

Choice and Action

Human action is purposeful - it is always preceded by a choice.  There are very few things that can legitimately be said to have been done accidentally.  A reflex action that takes place in less than a second may be truly accidental - but this is highly uncommon.   The majority of actions are undertaken willfully.

This is not to deny the existence of unconscious behavior, merely to consider action as a subset of human behavior - that which is conscious and deliberate. However, it must be accepted that very little behavior is unconscious - any behavior that lasts more than an instant is deliberate.  Nor is it to state that "action" by this definition is always the result of direct thought.  Much of what is misrepresented as "unconscious" action is in fact inattentive action - a person makes a choice to focus attention on one thing and pay little to no attention to anything else.   The negative consequences of these actions are the result of the choice not to give attention to the consequences.

Even a person's deliberate action may be undertaken with only a vague notion of the end he wishes to achieve, such that the things that he does may be intended to achieve it, but entirely incapable.  Said another way, a random and stupid action is still an action and to suggest it is unconscious or unintentional is merely a weak attempt to escape blame for having chosen to behave in such a way.

Man's deliberate actions are undertaken to control himself and influence the environment.   There are certain limits to the power of man to exert influence - but these are not as limited as some may assert.  That is, a man cannot stop himself by force of will from falling ill, but he can stop himself by force of will into entering into an environment that is likely to make him so, and he can stop himself from remaining ill for long by taking the necessary actions to restore his health.

Psychology seeks to discover the motivation of man to act, and this approach considers actions to be rational when they are beneficial, or at least benign, and irrational even to the point of insanity when a man intentionally undertakes actions that are detrimental.   But psychology itself is a projection of vanity and tends to be false.  An individual who is asked the reason he took an action tends to suggest noble motives, whereas an analyst who attempts to find a "hidden motive" is generally following his own desire to prove a cause.   This is hardly scientific, and while it is better than nothing at all, it is often quite inaccurate.

Action is not a wish or an intent, but the consequence of wishes and intents.  A person may consider doing something and then not do it, or may find that selecting a given course of action eliminates our ability to take others, at least for that time.   Action is only that which we actually do, not what we intend.

In a similar sense, the outcome of action is the actual results and not the results that an individual wished to achieve.   Ethics may forgive mistakes in consideration of good intentions, but praxeology does not mitigate: what happened is exactly what happened and what resulted is exactly what resulted, and imaginings or rationalizations are moot.

To do nothing is not an action, but merely a choice not to undertake action that might have achieved results is a choice to abstain.  It does not, as some would suggest, cause an absence of what might have existed were the individual to have undertaken the action, as nothing that had ever existed is destroyed by the failure to create it.

And one final thought: to say that action is a manifestation of man's will does not mean that his will was not constrained.   A choice to "do or die" is still a choice to do (to avoid the choice to die) and is based on the assessment of the likelihood of the suggested consequence.  It is again in the sphere of ethics to define the "goodness" of an action that is taken under compulsion.  Ultimately, accepting compulsion and obeying the commands of others is a demonstration of will and not the absence of it.

Thursday, March 5, 2015

Transactional Engagement

Transactional engagement considers the behavior of the brand and the behavior of a customer to occur in exchanges – if you do this, I will do that.  In its most basic sense, there are positive exchanges (if you do what I want you will be rewarded) and negative ones (if you fail to do what I want you will be punished) - along with a neutral middle ground (if you are doing neither good not bad I will ignore you).

The transactional model derives from primitive traditions such as the cultural mechanisms of power and control, in that the “provider” has the power to reward or punish those who depend upon his product, such that their only choice is to comply (and be rewarded) or refuse (and be punished) and they have no input otherwise.   The goal of transactional interaction is to make customers do the bidding of the firm, which is in a position of power as the only provider of a given product.

The flaw in this model should be obvious: power on the part of the provider rests on the assumption of being the sole provider, which is not the case in a competitive marketplace.   The customer is simply not required to accept the terms dictated by a brand for receiving its benefits when there are other brands that are serviceable to their needs and less imperious in making demands.

Even when transactional engagement is effective in getting customers to be obedient, it is highly effective in getting nothing more than that: and therein lies the problem.  The customers do not understand what they are doing, do not feel personally invested in the brand, and consider the engagement to be a one-time transaction done for convenience.   Eventually, they will recognize a more efficient or effective method of accomplishing their goal.   Should things go wrong, they are unconcerned – they are following their orders, and the outcome is not their responsibility.

Transactional engagement minimizes the amount of time a brand and a customer spend interacting with one another – which does provide the value of convenience.  So long as the terms dictated by the brand are acceptable, customers will interact with it on the assumption that their basic expectations will be met, and the knowledge that the brand cares for nothing more than that.   Sometimes, that is entirely sufficient.