The Long-Term Effects of Discounting

I read another tiresome diatribe against Walmart's cost-cutting strategies and the way in which they drive down product quality and sell goods that are cheap and shabby in order to offer consumers low prices.   I don't disagree at all that this is exactly what has happened - but I would disagree with the suggestion that it is unilateral, or even the suggestion that this idea originated on the supply side.   Retailers seek to gain business by giving customers what they want and the price they are willing to pay - and their commercial success (profit) is the measure by which they have been successful in doing so.

That is to say that a customer who demands a low price is in the first place unwilling to pay for quality.  It's a garbage-in-garbage-out situation, in that if you are only willing to pay so much, the retailer (and manufacturers as well) can only put that much effort (and quality) into providing what you demand. So if you are willing to pay only $7.50 for a shirt, the manufacturer can pay only $7.50 on the materials and labor to manufacture that shirt - and that is if the manufacture has no overhead, no transportation costs, no general and administrative costs, and takes no profit at all from the transaction.  But if you are willing to pay $15.00 for the same shirt, the manufacturer can spend double the amount to create it - which enables them to use better materials, hire more skilled laborers (and compensate them fairly), and undertake necessary expenses in order to make a garment that has twice the quality.

The problem is that many customers are unwilling to do that: in seeking the lowest price possible, they provide insufficient resources to the manufacturer (and the entire supply chain) to provide more than the lowest quality possible.   The demand for high quality at bargain prices is self-contradictory and self-defeating.

And when this occurs on a widespread basis, the quality of all options to the consumer is diminished.   While there is still a broad choice in retail, such that a customer who genuinely values quality (and demonstrates with their actions rather than merely their words) has the option to shop at retailers in the quality, premium, and even luxury ranges.   They don't have to accept the low quality of a $7.50 shirt but can get better quality by going elsewhere to purchase a $15 or $50 shirt if they are willing to pay to have quality.

But consider the effects on cost-cutting on industries in which there are not that many options.   Domestic airlines are an excellent example, one about which customers frequently complain, and one in which the quality of service has diminished greatly over the past few decades such that some travellers still remember - and long for - the way things used to be when travel was a pleasant experience but came at a much higher price.

There are still a few international airlines (Singapore, Cathay Pacific, and the like) that undertake effort to make travel a more pleasant or at least less onerous experience.  But domestically, there seems to be no premium option.   Online travel agencies cater to the customer demand for the cheapest available flights, diminishing the revenue to the airlines, diminishing their ability to pay for the goods and services that reduce the unpleasantness of the travel experience.   And as such, I have not experienced nor heard of an airline that offers anything but a cattle-car level of quality to domestic travellers.

The original argument erroneously claimed that quality is reduced because corporations cut quality and maintain high prices in order to boost their profits - but I don't think that the fellow who made this argument took the time to glance at the income statement of the company he was criticizing.    Walmart runs at a profit margin of less than five percent (and closer to three) and has done so for decades.    Most domestic airlines are presently running at a loss, and must either raise prices or reduce quality further in order to be sustainable.

Moreover, many of those who whine about the situation continue to patronize the very brands they criticize: they castigate Walmart for the low quality of its merchandise, the low wages they offer their employees, and the low margins they offer their suppliers.   But they don't complain about the low prices they are getting.   And in so doing, the only thing that can be learned from their arguments is that such people simply do not have a good grasp of cause and effect.

Junk Science Junkies

Every so often, the topic of subliminal advertising comes up in a conversation about user experience, in which some well-intentioned but ill-informed person mentions the experiment conducted by "scientists" that proves subliminal advertising works.

What they are referring to is the Vicary hoax - in which a market researcher with no academic credentials (aside of an associates degree in business) pretended to use a tachistoscope (which he never actually used) to flash messages "eat popcorn" and "drink coke" on the screen of a theater, and reported an unusual increase in concession sales (he later confessed the numbers were entirely fictional).

This hoax is often mentioned in introductory marketing classes - and I'd go so far as to say that any professor who doesn't immediately bristle at the notion of subliminal advertising is likely doing a disservice to his students - yet in the "real world" of business, it seems that in my experience someone mentions the topic every six months with an air of dead seriousness.

Given that frequency, I feel reasonably safe in asserting that the business world, in general, is addicted to junk science.   Any promise of getting better returns is eagerly embraced without checking the facts behind the grandiose allegations of "scientific" proof - because those who wish to make money have a pronounced case of selective hearing.

There have even been instances in which I've switched on the projector and shown the Wikipedia article on James Vicary and his hoax.   And rather than apologizing and shutting up, as well they should, the person who brought up the topic insists "that's not the study I was referring to" and maintains there is real scientific proof out there somewhere - a nearly identical study done by real scientists who achieved real results.  Not one has ever responded to my request for them to email me a link to the research.

This is more than intellectual laziness, but a deeper form of self-deception that business people inflict upon themselves - and worse still, attempt inflict upon others who know better.

Over a century ago, Hugo Munsterberg wrote that business has very little use for science, on the grounds that scientists are too far removed from practical matters to provide them any useful guidance.   I have the sense this is not true today, and may not even have been true in Munsterberg's time.   The problem with science is not that the information is abstract and impractical (though early exploratory studies can be thus), but that science is disregarded unless it "proves" something that is already believed.

And while business does seem to have cracked open the door to let science into the conference room, it still remains steadfastly devoted to being given research that supports the opinion that was had before the research was conducted.   Those who fail to confirm existing beliefs, or who challenge them directly, are not hired to conduct research in future.

In that sense, there is in the present day an even greater need for science to remain purposefully aloof from the business world - and to maintain its integrity instead of fudging the results to retail clientele who want to be coddled rather than informed.   Let those who value knowledge seek it - they cannot, nor ever could be, forced to accept it.

Imitation Done Right

A post I wrote a few years ago about the difference between invention, innovation, and imitation has received a significant amount of attention, particularly in the negative light in which I cast the practice of imitation.   And rightly so, as I was rather bold in characterizing imitation as

"an individual of inferior intelligence or insight who is merely copying a pattern of behavior he doesn't understand and putting blind faith in his ability to achieve similar results."

Having been chastised for making that statement, and having meditated a bit more on the matter, it seems necessary to qualify that - but only by inserting the word "often." Most acts of imitation I have witnessed or heard about are indeed brainless mimicry.  But this does not rule out the possibility that imitation can be done in a well-considered manner and can have positive results - but to imitate effectively requires a considerable amount of diligence.


Step One: Imitation as the Basis of Learning 

Imitation is often the first step of human learning: an infant mimics the sound of human voices in order to learn to speak.  Parents teach their children to speak words simply by stating them and expecting the infant to copy - which the infant readily does when it reaches the stage of development at which motor coordination and cognitive development permit.

It is by this method that all human beings learn to speak - by first mindlessly copying the sounds we hear and uttering combinations of we don't understand, but to which others seem to respond.  It is not until later that we associate words to the things they represent and begin to form our own sentences.   An adult can learn foreign languages by cultural immersion (rather than classroom training) in much the same way - by hearing words we do not understand, repeating phrases to learn to make the proper sounds, and eventually understanding how to compose original phrases.

But before mimicry gives way to understanding, it remains a mindless practice of merely copying something we do not understand - which serves little purpose.   And this is the reason I had been so negative on the notion of imitation in the previous meditation: many people claim to be "strategic thinkers" who are merely imitating what they see without understanding it to any appreciable degree - they have taken the first step on the journey to intelligence, but seldom take the second, or any other.


Step Two: How Imitation Yields Knowledge 

Imitation to be strategic: we should not only observe the behavior, but also the results it is achieving, and then apply our critical and analytic faculties to determine whether there exists a causal relationship between the behavior and those results - and we must be diligent in our scrutiny.   This step is often missed, or consciously skipped because it requires a great deal of mental effort to accomplish, as well as the ability to reason things that are not immediately perceptible.

Many seemingly intelligent people assume that correlation implies causation without due analysis.   Superstition and luck are based on such poor reasoning: if a salesman was wearing a particular necktie when he closed two major deals, he begins to regard it as his "lucky" necktie and puts faith in the notion that wearing that particular tie has some contribution to his success in closing the deals.   It's a rather silly notion that one has anything to do with the other, but it is rather astounding how widespread this kind of sloppy thinking happens to be.

I cannot count the number of times in which a discussion about website design degenerated into this sort of thinking: suggestions such as "let us copy the fonts and colors used on Amazon" or "we should copy the page layout of Expedia" - as if the font, color, and layout had anything to do with their success.   It's no sillier than having a lucky tie - and perhaps it is even sillier because the connection between behavior and results is not known (the salesman with the lucky tie can at least cite two instances in which the tie was correlated to success in his personal experience).

What should be obvious is that if our aim is to achieve a given result, we must not merely witness behavior that coincides with the result, but apply our critical minds to determine if the behavior caused the result to occur.  I feel like I'm being a bit punctilious here - but given that this step is so often ignored or skipped, it seems necessary to be meticulous in making that point.

The sad truth is that sometimes imitation works out for the better even when we did not do this analysis - which leads to the notion that analysis is not necessary.   It's the same lucky-tie conclusion that what seemed to be necessary (or in this case unnecessary) is in fact so, and no further thought is necessary when imitating - even when we are imitating a practice of imitation.

And so, for imitation to yield knowledge - to say in fact that adopting a given behavior will achieve a specific result - requires a more significant amount of observation, analysis, and reasoning than merely noticing that the two happen to coincide.  And this must be done with objectivity and with a careful effort to avoid many common fallacies about causation.   But the process does not stop here.


Step Three: How Imitation (Can) Yield Results

At this point in the process, it has been observed that a given behavior coincides with a given result, and a careful analysis of causality has been performed to ensure that there is more than just coincidence, such that we have a plausible case for a cause-and-effect relationship between the behavior and the results.   But before confidently choosing to imitate behavior, one step remains: a comparative analysis to ensure that the situation in which we mean to implement the behavior is sufficiently similar to the situation in which the behavior caused the outcome.

To begin with a ludicrous example: it can be observed that high-octane gasoline makes a race car go faster - and those who understand the mechanics of internal-combustion engines can explain the reasons why it is so, establishing a causal relation between high-octane gasoline and speed.  An astoundingly simple-minded person might them jump to the conclusion that he ought to force-feed high-octane gasoline to a race horse to improve its speed.   I expect that I do not need to explain why this imitation will not work.

But then consider how many sites covet Amazon's one-click ordering process: the brilliant simplicity of being able to store payment and delivery options to give shoppers the ability, with a single click, to purchase an item.   It works wonderfully for items that have no configuration options, but even Amazon doesn't use one-click ordering for items that have to be configured (a shirt for which a person must specify size and color cannot be ordered with a single click) - and in those instances a one-click ordering system does more harm than good (many product returns from disgruntled customers who received items that were of no use because they were not configured properly).

Flaws in the comparative analysis can be very subtle.   Tradition and documented procedure often suffer from the failure to consider if the present situation is analogous to a past situation in which a given action had a given result.   As such the notion of consistency is flawed by its assumption that the present is exactly like the past in all the ways that matter and that past practices can simply be imitated to achieve the same results.

And yet, discussions about selling complex products such as investments portfolios and insurance policies invariably involve at least one person who claims "we should do one-click ordering, like Amazon," after which at least one other person must carefully (and often repeatedly) explain what should be painfully obvious: that one-click ordering isn't even a viable option for selling complex products.


Summary: Imitation Done Right

To boil all of this rumination down to a simple procedure, strategic imitation consists of three steps:

1. Observation - Witnessing the coincidence of a behavior and an outcome
2. Causal Analysis - Determining if there is a cause-and-effect relationship between the behavior and the outcome
3. Comparative Analysis - Determining if the cause-and-effect relationship will remain valid an effective under other circumstances

Skip any of these steps, and imitation becomes mindless and ineffective.

When Rewards Become Sarcasm

Very often, doing the right thing in the wrong way can completely undermine its value.  Case in point, the present fascination with "gamification" by those who do not have a firm understanding of the concept is leading to some very awkward and even offensive practices in online experiences.   I'm most concerned of late with the notion of "badges" and "social rewards" with which retailers wish to encourage shoppers to give them more business - I have a sense there is some potential, but its present misuse may be damaging the potential of the practice.

In the context of a game, a badge is an icon or emblem granted to a player for completing a significant or unusual accomplishment.   "Significant or unusual" is critical, because a reward loses its value if the act it represents is common or of little significance.

To be granted a badge for completing the first and easiest level of the game on the lowest difficulty setting is not of value to a player because it's something anyone can do with very little effort.   It's tantamount to getting a diploma for completing kindergarten - which, ironically, is something that is actually done at some schools nowadays.  A trivial reward such as this is a nice gesture for the kids because they are not particularly intelligent or sophisticated at that age - but I've never heard a parent brag about their child "graduating" from kindergarten.

And therein lies the problem with granting rewards to adults, who are usually intelligent and sophisticated, for trivial accomplishments.  An adult studying a foreign language places little value in a photocopied certificate awarded to them for completing the first week of lessons.   If anything, such trivial gestures become a form of insult.   "Good for you, you've learned to tie your shoes" is not a compliment, but sarcasm to anyone beyond the age of five.

The same is true of retail rewards and badges for creating an account on a merchant's website, or purchasing an item, or successfully entering a delivery address.    Obtaining the product is the only reward that is necessary for the completion of such a trivial action, and any "extra" reward is unnecessary and a bit perplexing.

The retailer's self-serving agenda is further revealed when it is suggested that the customer should announce a trivial reward to others they know in social media - it is clear that the retailer does not mean to reward the customer, but merely to connive a way to get them to promote the store to their social network.   This fails miserably because a reward that takes the tone of a sarcastic insult is not something most individuals would care to announce to their friends and colleagues.

Moreover, this practice is damaging not only to the retailer whose reward system is poorly conceived, but to all retailers that might wish to leverage a social media reward system - much in the way that some advertisers' indiscreet use of email marketing has caused all commercial email to be disregarded as spam, even those that are the product of carefully targeted and thoughtfully planned advertising campaigns.

Thus considered, it may already be too late for retailers to leverage social media rewards programs because poor use by some has poisoned the well for all: the prevalence of trivial emblems is so great that every emblem is regarded as trivial, even those that represent a unusual or significant action.

Organizational Disorganization

In "Anarchy in the Office" I considered the rather bizarre concept of a project execution environment in which there were no formal leaders, merely ad-hoc coordinators that leveraged voluntary resources to complete tasks.   It seemed an interesting but likely impractical arrangement, and I've since read a book that proposes to do the same not only for a specific environment, but entire companies.

Peer Leadership proposes a networked (rather than hierarchical) organization structure, in which individual employees are like nodes of a computer network that are engaged as needed to accomplish organizational tasks - or which can, on occasion take on coordination of the efforts of others when they recognize the need for something to be done.

It remains an interesting concept, though it strikes me as being even more improbable on that level, given a number of potential issues - chiefly, that most of the day-to-day operations of a business are rather routine and non-dynamic and require the ongoing involvement of the same resources with few situations in which deviation from standard operating procedure is necessary.

Granted, the problems many companies face in a competitive environment is that standard operating procedure becomes bureaucratic and inflexible, as the author rightly suggests:  a front-line employee perceives a need for a change to be made, must communicate it up the chain of command to a high enough level for someone who is not familiar with the problem to authorize a change or deviation from established process, and then the change must be socialized within the organization before communicating back down to the front lines for implementation - a procedure which can take days or months.

But as in many things, I expect swinging the pendulum to the opposite extreme could do more harm than good ... or perhaps it's just that I've become institutionalized to the traditional approach of command-and-control hierarchies that I can't fully concretize the concept.  I don't really think that's the case, but I'll allow for the possibility.

My sense is that the determination of the amount of authority given to those on the front lines of an organization largely depend on the task in question.  For some tasks (day-to-day operations that are repeated) the procedure/control structure is likely the best approach whereas for others (which focus on changing the procedures that guide routine actions) a great deal more latitude is necessary to make progress.   To impose the organizational structure of one upon the other would be counterproductive.