ECONOMIES OF SCALE AND THE ROLE OF SERVICE

Economies-and-diseconomies

THE LEGACY OF THE INDUSTRIAL AGE

The organization that fails to focus on the customer, by default, yields to an industrial-age paradigm where efficiency not effectiveness, internal processes not customer-oriented processes, and short term financial performance not long term growth are king.

Recall that the Industrial Age mind set –  still the most prevalent frame of reference among business leaders – is characterized by a focus on:

  • Regimented labor [follow the script, do as you are told, etc.]
  • Leveraging hard assets such as property, plant and equipment
  • Cost-efficient processes where production is the end game
  • Internal processes
  • Short term financial results
  • Supplier-driven production objectives
  • Mass and uniform production

It should be pointed out that all of this led economist John Kenneth Galbraith – hardly a free market capitalist [if you ever doubted where his head was at on these matters recall his quip about capitalism being a system where “man exploits man.”] – to say that, “Our economy for all of its ideological billing, is in substantial part a planned economy.” That is, a production economy where suppliers tell us what to buy.

WELCOME THE SERVICE AND INFORMATION AGE

We are now living in an age, however, where the true value of the enterprise – that is to say the power of the enterprise – is found in:

  • Front line workers
  • Intangible assets [people, processes, brands, alliances, systems, data, etc.]
  • Effective processes where production is a means to an end
  • An outward – customer – focus
  • Service and information content bundled into all products
  • Customer relationships
  • Custom tailored, small lot, differentiated solutions

The supplier who leverages service with these ideas in mind has a better chance of offering up solutions to the market place that are less likely to succumb to the ravages of low-cost producers – or those who behave as though they were – and who attempt to flatten the best economies of scale we have to offer.

What we do when we leverage service is to confound that formula by introducing economies of scope – which are less susceptible to flattening. Liberal return policies, product warranties, education and training, consulting assistance, real-person telephone installation and remedial support, and so on are less apt to fall prey to the assembly line tactics of suppliers whose mantra is to seek marginal cost improvements through production volume increases.

A single-minded focus to enhance  operational efficiencies and bottom line results works to the advantage of the low-cost producer in an industry. That is true. It is also true that at some point the next unit of production plants the seed for its own diseconomies of scale.

A customer-focused supplier, on the other hand, creates a sustainable competitive advantage that cannot be assailed by a low-cost producer. My experience is that an excellent service provider can only be bested by an even more superior service provider.

 

Management Advisor

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One Comment → “ECONOMIES OF SCALE AND THE ROLE OF SERVICE”

  1. Raul Pupo says:

    Once again, Mr. Pupo has captured the essence of the challenge facing today’s “Change-agent Executive” – that being the steel-trapped mindset of his peers and superiors. They are stuck in the industrial age “stinking-thinking” of low-price versus high-service, of flat-commodity versus high-value added, and of self-centered myopia versus customer-centric vision. To borrow a 90’s era political T-shirt spin-off – “It’s not about the economies stupid, it’s about serving the customer”.
    As a Chief Service Strategy Executive, I applaud Mr. Pupo’s, courage and tenacity in driving the customer-first message to the strategic commerce battlefield. Raul’s customer service excellence concepts fly high with those concepts of other successful thought leadership eagles such as “Customer Centricity” from Andrew Rowsell-Jones/Executive Director of Gartner Worldwide, and “Customer Obsession” from Jeff Bezos/CEO of Amazon.com.
    When the customers’ scales weigh out the difference between the pennies of price savings versus the dollars of value added benefits from supplier relationship driven vision, loyalty and integrity, the Economies of the Scale will tip toward relationship all the time.
    Jim Trotta, Chief Strategy Executive


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