Last week I spoke of marketers as liars. This week’s blog post is to atone for that.
One consequence of the 2008 financial crisis, the deleterious impact of which on employment and incomes still persist, is that it tarnished the image of bankers and managers. I would be hard pressed to defend bankers, even if some of them feel they are “doing God’s work”. In this post, I wish to defend the management profession.
At the risk of eliciting laughter, I believe that there is fundamental lack of understanding of why management is necessary, and consequently, why management is a noble profession. I realize it is relatively easy to make fun of the many unnecessary bureaucratic procedures that we all face everyday in our encounters with the government as well as the practices of profiteering businesses. But, this should not take away from the critical role of managers in any society, regardless of whether they serve in the non-profit or profit sectors.
Managers are indispensable because no society, no matter how rich, has the resources to fulfil all the aspirations of its inhabitants. There has to be some form of rationing. This can be done by rules as government agencies and non-profits do, hopefully based on “need”. Alternatively, it can be via the price mechanism (can you afford it?) as businesses and markets do. Neither mechanism is perfect.
The drawbacks of each can be observed clearly by contrasting the challenges of the UK Health Care System (NHS) with those of the USA. UK, which relies on need, has long waiting times, while USA which relies on markets has many uninsured (more prominently before the reviled Obama care). There is rationing of health care in both systems. Of course, it is more obvious in the UK’s NHS since everybody is eligible for care. In contrast, in the USA private system, the “blame” or “responsibility” of rationing health care is transferred to the individual rather than the government as it is the individual’s responsibility to buy adequate insurance. In general, the masses, despite misgivings, will be more satisfied in the UK system, while the elites will be happier in the US system.
Returning to my thesis, the point I am trying to drive towards is that great managers in either system through efficient operations manage to serve more people (citizens or customers) at lower costs. Efficiency (input/output ratios) is the magic potion that should be the focus of managers, regardless of whether they are driven by the altruistic or the profit motive. And, for the cynical, even in the profit driven business world, thoughtful entrepreneurs and managers realize that it is only by serving many customers efficiently that you create the most wealth for your business and yourself.
LOW COST BUSINESS MODEL
The low cost business model (articulated in my article: Strategies to Fight Low Cost Strategies, Harvard Business Review, 2006) employed by companies like Aravind Eye Hospital, EasyJet, IKEA, Vanguard, and Walmart is especially illustrative of how management through more efficient use of resources can help increase living standards.
Take the case of Aldi from Germany, often referred to as a hard-discount store. It is a minimally decorated outlet that sells a small assortment of foodstuffs and household goods – typically 1,000 items (SKUs) compared to a usual supermarket that stocks 30,000 SKUs. They are small retail stores with comparably lower staffing levels, and typically located in low-rent districts. Hard discounters have an extremely efficient supply chain, thanks largely to their limited SKU numbers and private-label focus, which make for a simpler operation. Aldi’s costs add 13% or 14% to the procurement price – 2% each for logistics, rental, overhead, and marketing, plus about 5% for staff. Its efficiency allows Aldi to offer products at startlingly low prices.
By keeping SKU numbers low, Aldi can cut supply chain costs because their own brands account for 80% of the SKUs. Since these private labels are typically priced at 50% below manufacturers’ brands, their success has helped rich and poor consumers cover their essential needs at much lower costs. And, yes, it has resulted in competitive pressures for the bloated traditional supermarkets and brand manufacturers.
Even if a company does not adopt the low-cost model, unless you are into luxury brands (where higher price is part of the customer proposition), all managers should be seeking greater efficiency (obtaining more output with fewer resources). Some of these gains can be directed to increasing profitability, but the rest should be devoted to reducing prices and / or investing in innovation. This helps expand the market (by lowering / maintaining prices), offer better products over time (through innovation), and build more sustainable organizations (through profitability).
Management can help improve lives because ultimately most of our interactions are with organizations, from the daily Starbucks to the infrequent immigration service. Countries that are developed have more efficient processes, developed by better managers. Unfortunately, often, especially in less developed markets, the belief is that it is scarce resource endowments that is the reason for difference with developed world.
Last week, I visited Switzerland. At the immigration desk, the encounter took less than 30 seconds and there was no form to complete. In fact, with the obvious exception of USA, the shorter the immigration form for tourists, the more developed the country is. Resources, time and money, are not wasted on inefficient processes. And, this is despite more people wanting to immigrate to Switzerland than India.
Similarly, this week, I was attempting to keep my mobile numbers with Vodafone India and Vodafone UK by just changing the billing to my personal account from my previous company. It was not easy in either country. Yet, the UK process was completed with fewer forms and interactions. For India, despite providing voluminous back up documents, I am still waiting, after two unsuccessful phone calls. Again, resources of both Vodafone and my time are limited. Management, via bureaucratic processes and through efficient utilization, makes large differences between societies.
TAKE A BOW
So, managers all over the world, especially in the business world, do not be shy. Take a bow for the valuable work that you do. And remember, the challenge is to serve ever greater numbers of satisfied customers through higher efficiency, while generating profits for the company.