Shifting Your Focus from Short-Term Efficiency to Long-Term Resilience

Welcome to HBR on strategy case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. Efficiency is usually something a business strives for, but is it possible to be too efficient? What are the downsides for businesses that pursue efficiency at all costs? Strategy expert Roger Martin warns that an obstacle recession with efficiency gains in US Companies has come with many social and economic costs. He sees those downsides in everything from staffing to wages and even corporate debt levels. Martin is a professor emeritus at the University of Toronto's Rotman School of Management. He argues that it's not too late to reprioritize, especially following the COVID 19 pandemic, which exposed many of these weaknesses and related inequalities. In this episode, you'll learn how to as a leader, shift your thinking to connect short term slack with a positive outcome long term resilience. You'll also learn why it's important to rework your business's larger strategy to avoid the trap of setting and meeting singular goals with plenty of real world examples. This episode originally aired on HBR IdeaCast in September 2020. Here it is.

Welcome to the hbr ideacast from harvard business review. I'm kurt nickish. For many people around the globe, now is a time of reflection. The coronavirus pandemic has made so many of us change the way we work, the way we interact, and the way we think and feel. It has also prompted many leaders to think more about how our economy is structured and what they can do to improve the system. Our guest today has been analyzing the growing economic inequality in US society, and he sees it as a threat to the democratic capitalism that underpins the country's historical success. He says that for too long we've thought of the American economy as a machine and that the end goal is always more and more and more efficiency. That's had downsides for businesses and for people, and he says it's time to rethink some of those structures. Roger Martin is a professor emeritus at the Rotman School of Management at University of Toronto. He's also the author of the book When More Is Not Better Overcoming America's Obsession with Economic Efficiency. Roger, thanks for joining me.

Hey, it's a pleasure, Gert. Thanks for having me.

So why is this obsession with economic efficiency a bad thing in your view?

Well, it's like everything in life. I think for almost everything in life, more is better up to a point when it ceases to be better. Love is a good thing, but obsessive love is a bad thing and causes people to hurt one another, if not kill one another. And so this is a case of we have ridden, if you will, the horse of efficiency to having a more productive economy, but past a certain point chasing after more efficiency without regard to anything else as having some consequences that are unexpected entirely. That includes having an economy where the median family in America is stagnating and has been stagnating for many years, While the top 1% are having a better economic time than ever. That's an inadvertent consequence of the obsessive push for efficiency.

Yeah. Where did this problem come from?

Well, there's been a long tradition of building towards this. We've had kind of great thinkers that have helped us understand the importance of efficiency all the way back to Adam Smith and his pin factory. There's this long history in the world of economics and then business of saying we should pursue efficiency. And I think the history of that just got us being a little bit mindless about it. And you know, that led to things like, well, gee, kind of, you know, Chinese workers can produce goods more efficiently, so let's outsource our work to Chinese workers. It would be more efficient to have fewer people on the store floor in our retail establishment. So let's cut staffing to the bone. It would be more labor cost efficient if we drove down wages to substance levels or levels below the living wage. Or it's more efficient to have a capital structure that has more debt in it than equity. So let's load up our companies with debt because that's more efficient. All those things make a certain amount of sense, but when you push them too far, you create something that is not at all resilient, like Toys R Us or iheartmedia that go bankrupt only because they've got too much debt. So the efficient capital structure, actually what was the cause of their expiring make.

The connection for me between efficiency and inequality.

Sure. We assume in the economy and in business, we assume that the kind of the outcomes that we're going to get are going to be relatively normally distributed. You know, a bell shaped curve. We just assume, say in economics there's going to be a big middle class, that's the bill in the middle, and then smaller tales of richer individuals and on the left side, a tale of poorer people. But it turns out that if you take a distribution like that and apply ever more pressure to that distribution, it can turn into a Pareto distribution. See, the drive for obsessive efficiency is what's putting More and more pressure on more economic systems. So we open systems to trade because trade is good for more efficiency. We deregulate. That puts more pressure on industries to perform and become more competitive, more intensely competitive. And in these industries, when you get to that point of intense competition, essentially when I win a piece of business against you for competing, Kurt, I become stronger and you become weaker, and then I have the better chance of winning the next piece of business, which makes me stronger still and you weaker still, et cetera, et cetera, until I've got all the business. You have the Pareto outcome. And that's why what's happening is the stagnation of middle incomes economically as fewer people are winning bigger and on the bigger basis of winning, win bigger still. And companies, we're having companies consolidate to fewer winners winning bigger. And it's not just tech, it's across industry after industry. Nobody set out with that as the goal. So I'm not saying there was a grand master plan by some evil person or evil group to make it this way, but that's what we're getting. We're getting these more extreme outcomes and it's unfortunately, in my view, inconsistent with democratic capitalism.

Right, right. How has COVID 19 made this worse or exposed this weakness in the system?

Well, I think it has shown what some of the consequences are. Hospitals leading up to Covid, they were busily doing, you know, a couple, a couple of things that seemed good at the time, like cutting nurses. Right. To make sure that they didn't have excess staffing of nurses, because nurses are actually one of the biggest cost items in a, in a hospital. And making sure that their supplies, they weren't investing too much working capital in supplies. And so when Covid hit, they had the absolute bare minimum number of nurses to cover the patient load that they had. And they had very little in the way of ppe. Because having PPE sitting around ventilators, sitting around gowns, sitting around masks, sitting around in storerooms was wasting working capital.

How do you think we can start finding more balance in the system? I mean, capitalism is a ginormous ecosystem and it just can feel like a big task to rebalance, as you might suggest.

Yes, I agree. I think it's a big task. The good thing is it doesn't have to be super dramatic. We just need to drift back away from obsessive efficiency to something that is more resilient. The good thing about the world of business is it's kind of bloody minded, which means, unfortunately, it can be bloody minded in bad ways. Like let's grind down wages by shipping all our manufacturing to China, because that seems to work well. But a crisis like the pandemic will help business leaders see that there is a balance there. So I think there'll be some natural balancing. But I mean this is the purpose for writing the book. This is an unrecognized effect that I don't think any business leader particularly wants. And so by alerting them to this fact and to say, you know, slack is not, you know, the ultimate enemy.

You're talking about slack. The business term.

Yes. Is that you must get rid of anything that's that slack. So business leaders over the last 20, 30, 40 years have been attacking it as if everything should be made to go to go away. You should not have one excess labor hour on your store floor, your shop floor. And I think that business leaders have to now see that as actually not the target. The target should not be zero. In fact, Costco, you know, the great and successful Costco makes a clear point of this. They know what maximally efficient in that short term sense staffing is per on the floor and they just add a bunch and they just say, okay, if that's the kind of the minimum we could have, let's just have some slack there. So customers feel like they're being taken care of. We have customer loyalty. They buy more because they can find more of the things they really, really want and not get frustrated. And sure enough, they've got way higher sales per square foot and profitability than their competitors by embracing the notion that some amount of slack is good.

So some of this is the job of policymakers when you talk about larger systems. But in companies, what do you think leaders and managers can do and should do about all of this?

Well, I have in the book, I've got four recommendations for executives. One is what we've just been talking about, which is recognize that slack is not the enemy to be eliminated. It is a variable to be kind of balanced with an eye to longer term resilience. I also say that we've got to business has been on this half century drive towards reductionism where we're getting more expert in each element of business, marketing, operations, hr, finance, tax, and treating each of them as something independent and separate. Yeah, it's like a machine, right? The machine metaphor. You can break a machine into its components, optimize each component, add them back together and it'll all be fine. That's what companies think they're doing. And that's unfortunately what the business schools of America and the world teach. They teach in these silos, and then people go into silos. But that's the machine metaphor. And a business, just like the economy, is not a machine. It's a natural system. It's a complex, adaptive system. And so businesses are going to have to think more about how the system works as a whole and stop worshiping at the altar of deeper and deeper, narrow expertise. That's going to also take business schools teaching differently. The third thing I say is that, is that we've got to be careful about these unitary objectives. What happens when a company says, this is our one objective, like shareholder value maximization, but it can be like sales growth, like any one thing. What tends to happen is that goal gets translated into a single measurement, and then we start to think of that measurement as the goal itself. So Wells Fargo is a cautionary tale in this, which is the goal is deeper relationships with our customers. We say, how are we going to pursue that? It's by maximizing the number of accounts per customer. And so we start to think as though accounts per customer is a deep customer relationship. No, no, no, no. It's just a measure of a deep customer relationship.

Right.

But then we say, since that is a deep customer relationship, we will give people incentives for getting more accounts per customer, and we'll punish them if they don't. And so the organization starts opening accounts for customers that they never asked for or wanted and for. In fact, customers are apoplectic when they find out. But that's what happens when you have singular goals. The measurement gets surrogated for the goal. And there was a period in the 70s and 80s where a bunch of influential scholars like Milton Friedman and Mike Jensen convinced business that it became doctrine that you had to have a singular goal, otherwise people would be confused as to how to make decisions. And that has created all sorts of problems. I think another scholar and management consultant, Kaplan and Norton, with the Balanced scorecard, had a better idea, which is you should actually pursue a variety of goals, some of which are actually kind of internally inconsistent, to prevent you from going over the edge and pursuing a singular goal. It's like Southwest Airlines says, we want to be the lowest cost airline and the highest employee satisfaction and highest customer satisfaction and most profitable airline. How do you get to be the lowest cost and highest employee satisfaction when you can't grind down labor costs and wages to the lowest possible, like others like, you know, Eastern and People's Express, and they, like, had done before.

Right.

Well, the answer is you got to be more clever. You got to Create a business system that requires fewer people per seat mile, fewer employees per seat mile, that you can pay more than your competitors. They're the highest paid employees in the airline industry and you achieve low cost. It's because grinding down labor costs does not become a singular goal. Driving down cost doesn't become a singular goal. You have to figure out how to do it in a way that produces multiple outcomes.

What have you seen leaders doing already, either as a reaction to COVID 19 or otherwise, to try to move away from this cult of efficiency and toward better outcomes for business and society?

Well, we just saw Walmart last week take 100,000 employees and raise their wages by around $6, or at least that's what was reported. That's a recognition in one of the companies that has historically been obsessive about efficiency past the point of optimality, in my view, to say, gee, we have to think a little bit differently. And they were influenced by one of the people I talk about in the book, Zeynep Tan, the MIT professor who wrote the Good Job strategy book that said you can do better, make more money by paying your workers more, training them more, cross training them and reducing excessive assortment. And so they were influenced by that theory and have done that. So that, that I think is a good outcome. And I think it was partially Covid related because these were essential workers that risked their lives, if you will, in the middle of the crisis to keep Walmart stores open, as was the case with Target and all these other stores. It wasn't Walmart alone, but that's got to be seen as a positive step.

Yeah. And you mentioned Costco before, that's also a company, awesome company that pays above kind of market rate for wages.

Yes. And if you talk to Jim Senegal, co founder and CEO of Costco, he's got just such a system dynamic view of things. Right. He does, I think, view Costco as part of a natural system. And that's why he's totally into promote from within. It's really hard to get a job at Costco management unless you worked in a store of Costco and worked your way up through the system. And he says, well, that means people who kind of love the company, love their customers, know what goes on in a store. That way we'll get more people coming in who are talented from the bottom because they know they have a chance to go up. Those are like systems, system dynamic views rather than, hey, the best way to do it is get as many, you know, talented free agents from the outside as we can.

And Any other remarkable examples that you can think of?

Well, I, I love Four Seasons. You know, we're talking Costco, Walmart, which are kind of more, you know, you know, at the low end, at the, at the high end, you know, the best hotel, luxury hotel chain in the world. Izzy Sharp, the founder, says he's got a golden rule. The golden rule for him is unless we treat our workers, our employees, our associates like we want them to treat our guests, our guests won't get treated that way. Which is a wonderful system dynamic approach and it leads to things like when the tsunami flattened the Four Seasons in the Maldives.

Right.

They told all 400 employees, you know, we got no hotel now, so you can't work here. But we'll have a new one in three years. And in the meantime, we will find a place for you in Four Seasons worldwide to work so that when the hotel is open, you can come back.

What can CEOs and businesses do about income inequality in particular?

Well, one is, one is, you know, there are 40 plus million jobs in the US that pay less than the living wage and take, and just say we're going to pay a living wage. I think it's totally doable. And the companies that do it are rewarded by their employees for doing it. And if everybody got a living wage, there'd be more dollars in the economy to spend and it would spur the economy. So that's for sure one thing they can do. I think too the second thing is just to be more imaginative about solutions. When you're attacked competitively, does that mean the first thing that you need to do is chop costs? I think the answer is no. Right. That's one thing and sometimes you need to do that. But another question you can ask is how could I do this differently and better? And if we had more executives asking that question rather than saying first thing to do is job costs, we'd be a lot better off and there'd be less income inequality.

And what can individuals who maybe aren't the CEO, what can they do? And not just about income inequality, but also trying to work for a more, less efficient, more holistic business.

Sure. Well, one simple thing is to multi home. By which I mean if they like a given service, let's say they like Facebook for their news feed or they like Uber for their transportation or they like Amazon prime for ordering the goods that they, they use, what they're doing when they commit all of their purchases usage in those categories to the dominant player is creating a dynamic that is creating Pareto outcomes. Winner take all outcomes. Because if you add all that behavior up, it becomes extreme behavior. And in all of those cases the effect Facebook having more users becomes the cause of still more of the effect and you get these extreme outcomes. Every citizen can strike a blow for more more balanced outcomes by just saying even if I like Amazon Prime a lot, rather than using it for all my purchases, let's just use it for most of my purchases. But sometimes I'm going to go to the corner store and somebody sometimes I'm going to buy from Walmart or Target. I may like Uber, but let let me use Lyft some of the time and taxis some of the some of the time. I like my like Facebook, but let me subscribe to my local newspaper too. All of those things will add up will add up to a dramatically more resilient, less winner take all economy. So every citizen, if they want a different outcome, can do it in that very small way.

Roger, thanks so much for coming on the show to talk about this.

Hey, it's a pleasure, Kurt. Thanks for having me.

That was strategy expert Roger Martin in conversation with Kurt Nickish on the HBR Ideacast. Martin is Professor Emeritus at the University of Toronto's Rotman School of Management. He's the author of the book When More Is Not Overcoming America's Obsession with Economic Efficiency. We'll be back next Wednesday with another hand picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. While you're there, be sure to leave us a review. We're a production of the Harvard Business Review. If you want more podcasts, articles, case studies, books and videos like this, find it all@hbr.org this episode was produced by Mary Dew, Ann, Sanny and me, Hannah Bates. Ian Fox is our editor. Special thanks to Rob Eckhart, Adam Buchholz, Maureen Hoch, Audie Ignatius, Karen Player, Ramsey Kabaz, Nicole Smith, Anne Bartholomew, and you, our listener. See you next week.