economies of scaleThe 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

This “bigger is better” argument might be attractive to business leaders as they witness decrementing average unit costs as a result of increased production volumes. But it’s instructive to remember that the economy of scale curve with the y axis representing cost and the x axis depicting production volume resembles a happy face for a good reason: once average cost reaches its nadir – the lowest average unit cost given the structure of the firm at a particular point in time – the curve begins to rise as diseconomies of scale prevail as the enterprise becomes more complex and unwieldy. From a service point of view, decrementing average unit costs might be an indicator of efficiency but hardly an indicator of effectiveness if the supplier becomes ever more distant from the consumer he is trying to reach.

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.


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 interactions 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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