The global economy is changing the rules in the game of business. For the last 200 years or so the most important consideration was efficiency; producing products for the lowest cost. But now we are all part of a global labor force and there are countries in Europe and North America that can no longer compete on efficiency alone because their labor costs (also known as our salaries) are so high compared to labor costs in countries like China, India, Russia, Poland, the Philippines, etc.
What is to be done? Will the economic boom for some countries be economic doom for others?
The global economy is changing the rules in the game of business. For the last 200 years or so the most important consideration was efficiency; producing products for the lowest cost. But now we are all part of a global labor force and there are countries in Europe and North America that can no longer compete on efficiency alone because their labor costs (also known as our salaries) are so high compared to labor costs in countries like China, India, Russia, Poland, the Philippines, etc.
What is to be done? Will the economic boom for some countries be economic doom for others? It could be if the only economic force we consider is efficiency. But we are missing something important when we do this. In addition to efficiency there is another economic force called responsiveness. Efficiency is what provides us with basic products and services at the lowest price. Responsiveness is what wraps those products and services in a blanket of value-added features that make them more valuable to each of us. Everybody has needs that go beyond efficiency. As soon as people are able to acquire the basics they want something more. A basic pair of sneakers costs about $20 but there are a whole lot of people willing to pay $100 or more for sneakers that respond to other needs. A basic new car costs about $20,000 but there are millions of people willing to pay twice as much or more to get cars that respond to other needs.
People want what they want; once their basic needs have been met then they want products and services that meet other needs (try doing a search on “Maslow’s Hierarchy of Needs”). They want a good price but that doesn’t necessarily mean the lowest price. They pay extra for other features as long as those extra features meet expectations. Responsiveness includes things like how products are produced, delivered and consumed. People willingly pay more for a good cup of coffee made just so and served in a cozy setting. People willingly pay more for fresh organic food grown in a sustainable manner. These value-added services make us happier and healthier than is possible with just the basic products themselves.
Differentiation Through Value Added Services
The key to success in the global economy is differentiation; to sustain an evolving mix of products and value added services that create wealth for many different types of customers. All businesses live on a continuum with efficiency at one end and responsiveness at the other. All businesses need to be efficient but unless you are the low cost leader in your market then efficiency alone will not be enough. Most businesses now need to move their focus more toward responsiveness. This is where they will find the best source of profits.
Here’s another thing to consider: All value added features and services are information based. That’s because they must be customized to meet particular needs of particular customers. What is valuable to one customer in one situation is not valuable to another customer in a different situation. And since customers and their needs are always changing, companies themselves need to get good at continuous change. They need to sell a continuously evolving offer of products and differentiate those products by wrapping them with value added services that they mix and match to meet the needs of individual customers.
There are far more ways to use responsiveness to attract customers than there are to use efficiency. This is because there are so many different kinds of customers and they each are looking for slightly different mixes of products and services to meet their exact needs. Companies need to realize that, for most of them, responsiveness is a better way to attract customers than efficiency.
The Illusion of Ultimate Efficiency
The notion of ultimate efficiency is the embodiment of a frame of mind inherent in the culture of the industrial economy and its great invention – the assembly line. That mindset attempts to organize every activity down to the lowest levels of detail. It makes rules and regulations for everything and then tries to run each activity over and over, faster and faster without changing anything. This is how you get greater and greater productivity at lower and lower costs; this is what we call efficiency. But this model is breaking down.
The assembly line requires things to stay the same long enough to churn out large quantities of predefined products and services. It is the best way to deliver masses of standard products and services at the lowest cost. But what happens when people no longer want standard products and services? What happens when product life cycles are measured in months instead of years? What happens when the very definition of what the product is keeps changing in ways so profound that merely making cosmetic changes to existing products is not a sufficient response?
The problem is that the global scale of our economy and the fast pace of events now overwhelms the assembly line operating model. We wind up spending too much time organizing work, writing out rules and procedures and putting systems and facilities in place. Then the world changes in unpredictable and uncontrollable ways and our plans don’t work out because they become so quickly irrelevant.
I once had a boss who was forever trying to screw down operations as tight as a drum – cut headcount and squeeze out the last ounce of cost in the name of ultimate efficiency. He would look at me with a maniacal gleam in his eye and laugh as he did this. His plan was always to run the operations hard and fast, day and night and reap the profits of ultimate efficiency.
The problem was that in spite of his best laid plans, the world would change in unexpected ways and then he had no flex in his operations to respond. Instead he would pound the table and insist there was no change; and if there was, well then everyone should just work harder.
Good customers often complained that we couldn’t keep up with their requirements. We missed profitable opportunities to be responsive and grow our business with them.
The Opportunity in Responsiveness
It’s time to get over the efficiency mindset and start getting good at responsiveness. Efficiency is now a given. You don’t need ultimate efficiency (which is an illusion anyway) just “good enough” efficiency. Companies can no longer reward themselves through efficiency alone. The global market sets prices, not individual companies (unless they exercise a monopoly). It is customers now who grant rewards in the form of paying higher prices and those rewards are based on responsiveness to their needs.
Good customers (and most customers are good customers when you figure out what they really want) will pay a few percentage points more in order to get a carefully tailored bundle of goods and services from you that either solves an important problem of theirs or enables them to enjoy a major benefit. Who are the good customers in your business? How will you get more of them? What are the tailored solutions you offer them? How will you evolve these solutions over time to keep up with good customers’ changing needs?
Here’s another thing to think about; if you don’t have many good customers then how will you keep your bad customers from destroying your profits and your business? Is efficiency alone a sufficient response to this question? Answering these questions goes to the heart of true business innovation.
