In this case, the downside to saving money by laying off expensive experience is clear. Unfortunately, the downsides are rarely clear before the upsides, and by the time the mistake is obvious, returning to the previous state is difficult, and an incentive has been created for short term savings at the expense of long term ones.
By way of example, several years ago I sold tools at Sears. Sears had spent decades building consumer confidence, particularly in their Craftsman brand. If you bought a Craftsman tool, and it broke for any reason, they replaced it, sans receipt. As a result, this warranty was transferable - there were no questions asked. While this policy certainly did not extend to every product sold at Sears, it did exemplify a commitment to service and quality: in the words of one older person I talked to once "if you bought it at Sears, you didn't have to worry."
As time went on, Sears was able to increase profit margins by slowly restricting the tool warranty, and using crappier parts. The obvious problem was that once Sears lost its reputation as a "you don't have to worry about it" store, it had to compete with stores like Wal-Mart on price[0].
The interesting problem here is not the Sears strategy, but the fact that it takes years for the effect of reduced quality to become obvious: in the short term, consumer confidence in the brand is still high, so the worse products are bought for the same prices, under the assumption that the quality is still high. By the time consumers on the average figure this out (when your drill wears down in 3 years instead of 10), someone that made the change has been able to demonstrate clear savings to the company and move on.
Several people have suggested solutions. The first one I hear thrown around is "get rid of executives." I think this is shortsighted in the same way that getting rid of a good IT department is. Certainly some executives are useless, but "get rid of the bad executives" is vacuous. A more compelling solution is to create incentive structures that encourage "bad executives" to be good ones, such as incentives which outweigh the short-term gains gotten by reducing, say, IT spending. For instance, I've heard it suggested that companies use long-term equity, say 15 years out. I'm not sure how that squares with moving from company to company, but it's interesting.
[0]This is not to say that the Sears quality-first business model was sustainable, merely that there was certainly a tradeoff, the effects of which take a long time to see in total.
In this case, the downside to saving money by laying off expensive experience is clear.
Things like time developers spend doing traditional IT tasks are clear to developers. But it's amazing how little of that is visible to executives. They certainly don't get an hour-by-hour breakdown of where developers spend their time. And the time to develop software is notoriously difficult to estimate even using the best techniques out there -- and most people just eyeball it. So executives really can't quantify the loss of productivity, they just hear programmers bitching.
"but the fact that it takes years for the effect of reduced quality to become obvious: in the short term, consumer confidence in the brand is still high," The only thing I'd point out is that the two are related. Sears had this policy for a very long time and so it slowly becomes an established fact. That's why you can make the cost savings change and show new profits for a quarter, 2 quarters, maybe even a year or two. Most likely the "smart person" who made that decision gets promoted onto another group that needs better margins. Then the wheels come off but the exec is long gone onto something else.
I'm asuming there would be an entire board of directors or some such who were aware of this decision. They can't all be so naive that they dont realize the danger of undermining their brand reputation.
sure, but what were their individual motives? If the CFO had a plan to migrate to SomeOtherCo(R) in two years if he did well enough at Sears, then maybe that was his horizon...
>In this case, the downside to saving money by laying off expensive experience is clear. Unfortunately, the downsides are rarely clear before the upsides
The general heuristic of pointing out information asymmetries even when they seem obvious is a good one. In fact I'd say my experience has been that most people could benefit by explicitly saying more obvious things. The reason people don't is for fear of looking bad.
Overcommunicate, overcommunicate, overcommunicate. Also, overcommunicate. It's remarkably helpful to overcommunicate-by overcommunicating you'll clear up a ton of miscommunications due to different assumptions you and the other person are making, even when things seem obvious. So again, overcommunicate.
I feel like reputation is an asset that pays dividends. You can sell it off in part or whole for a short term cash gain, but then your dividend payments will shrink accordingly.
> I'm not sure how that squares with moving from company to company...
The stipulation to accommodate moving from company to company could be an artificial constraint. The desired outcome goals of the company outweighs the desired outcome expressed by any individual executive. Incentive structures can reflect that.
There are many ways to accomplish this, but the reality is shareholders who wield sufficient power to enforce this goal-seeking simply are not interested in doing this. That's the real nut to crack. The incentive structure of owners and not just employees subject to the agency problem is part of the spectrum to consider.
Incentive structures all up and down the line of authority are a real tough design problem.
This reminds of a news story I distinctly remember about Circuit City from a few years back. They fired their senior sales associates and hired cheaper presumably less knowledgeable workers to cut costs. They were already on the way out at the time but I have no doubt this sped up the process as it signaled to their customers that experience and knowledge aren't a priority so much as the bottom line.
Ah, I was buying my tools at Home Depot and Lowe's (how the heck it's supposed to be pronounced?) and was thinking that may be I should now shop at Sears since I can afford it. But looks like may be it's not a good idea anymore.
>For instance, I've heard it suggested that companies use long-term equity, say 15 years out.
Not going to work, they will just trade whatever they got on some secondary market.
By way of example, several years ago I sold tools at Sears. Sears had spent decades building consumer confidence, particularly in their Craftsman brand. If you bought a Craftsman tool, and it broke for any reason, they replaced it, sans receipt. As a result, this warranty was transferable - there were no questions asked. While this policy certainly did not extend to every product sold at Sears, it did exemplify a commitment to service and quality: in the words of one older person I talked to once "if you bought it at Sears, you didn't have to worry."
As time went on, Sears was able to increase profit margins by slowly restricting the tool warranty, and using crappier parts. The obvious problem was that once Sears lost its reputation as a "you don't have to worry about it" store, it had to compete with stores like Wal-Mart on price[0].
The interesting problem here is not the Sears strategy, but the fact that it takes years for the effect of reduced quality to become obvious: in the short term, consumer confidence in the brand is still high, so the worse products are bought for the same prices, under the assumption that the quality is still high. By the time consumers on the average figure this out (when your drill wears down in 3 years instead of 10), someone that made the change has been able to demonstrate clear savings to the company and move on.
Several people have suggested solutions. The first one I hear thrown around is "get rid of executives." I think this is shortsighted in the same way that getting rid of a good IT department is. Certainly some executives are useless, but "get rid of the bad executives" is vacuous. A more compelling solution is to create incentive structures that encourage "bad executives" to be good ones, such as incentives which outweigh the short-term gains gotten by reducing, say, IT spending. For instance, I've heard it suggested that companies use long-term equity, say 15 years out. I'm not sure how that squares with moving from company to company, but it's interesting.
[0]This is not to say that the Sears quality-first business model was sustainable, merely that there was certainly a tradeoff, the effects of which take a long time to see in total.