The world's greatest organizations don't build sustainable growth with accounting schemes. Instead, they harness the unwieldy power of human emotions
I am still haunted by a two-inch graph that appeared last year in The Economist. Although the graph is small and very simple, it could be the most important business story this executive has ever seen. I cannot understand why it was not on the front page of every newspaper in America.
Maybe everyone knows why except me. Here is the graph.
You and I do not need to send this graph to our research department for translation. It tracks the "percent" of profit of all non-financial companies in the United States over the last 50 years. One thing you could do is put a little math to the trend line and estimate at what point free enterprise will go broke.
What you see is a relentless 50-year force gradually squashing the profit out of American companies. It's a monster stalking each and every one of us. Now, everyone has his or her time in the sun, when your product is unique, you have a strong market share and almost no clear competition. This situation might be driven by anything from great innovation, to simply being the "first" to open pizza parlors in your neck of the woods. It might be the result of government regulations that suddenly enable you to achieve decent margins.
At one point in history, Dr. Gallup offered the only poll in the country. He made terrific margins as virtually the only game in town. Now, there are roughly 5,000 organizations offering the same methodologies. The same thing has happened in lots of other industries. I remember when the telephone bills at Gallup were 30 cents per minute; AT&T charged us three dollars to conduct a 10-minute interview. We now pay about three cents a minute to MCI. So, a 10-minute interview costs us 30 cents compared to three dollars.
The frightening question is: Are companies great customer managers, or have we just talked a good game at company conferences, and at the end of the day become merely the world's biggest price slashers? The story of "the graph" is that you make your discoveries, build your new inventions, make great margins, and then ride the razor blade down to zero.
Again, the conclusions and implications from this graph tell 1,000 stories -- all of them haunting.
Let's go back to the telephone industry. Was this industry driven by 20 years of magnificent marketing and leadership by AT&T and MCI, and eventually Sprint, or was it driven simply by MCI slashing the once-great margins of Ma Bell? Did WorldCom take over because their chief could somehow endure the razor blade ride longer, and therefore keep slashing prices? Were the telephone wars just twenty years of controlled price slashing? Could the same be said of automobiles, computers, retailing, and on and on?
Recently, we have all developed great expertise as "cost cutters." We were terrible at this 25 years ago, but we listened closely to Dr. Edwards Deming and Dr. Joseph Juran, and they showed us how to greatly lower production costs -- brilliantly -- by "reducing variation." We supported this movement because it meant we could cut prices more. It slowed our ride down the razor blade.
"Re-engineering." We all did this and it also worked. In fact, we saved a bunch of money at Gallup by applying the theories of both of these significant corporate leadership movements.
We have been quick to learn how to cut prices but we have learned virtually nothing about how to grow margins. This ignorance leads to a desperation that accompanies leadership as it rides the razor blade. In fact, while penciling these thoughts early in 2002, this worried executive wondered if this sense of desperation has produced the current epidemic of financial reporting chicanery. At some point, we may all experience ethical cracks when the pressure is too much to bear. We are led to this desperate state by the evil of losing money -- not because we are natural-born thieves. Sick companies crack under the pressure of riding the razor blade. Apparently, it is much easier to hoodwink shareholders than customers.
So, here is the problem: We can't maintain our margins from normal operations when we are faced with extreme competition. What causes the problem? A customer relationship based solely on price. When all you have that differentiates you is your price, you are a commodity.
What is the solution? You have to have a relationship with customers that to some degree overrides price. If not, you will slowly, then suddenly, go broke.
Yes, you should use all the latest cost-cutting techniques and re-engineering type processes to improve efficiencies as much as possible. But these processes do not provide the long-term solution to maintaining your margins.
Again, the ultimate solution to reversing the current leadership trends of margin slashing, accounting trickery, and shareholder hoodwinking is to run an organization that can maintain and expand its customer base without slashing prices and without reducing its fiscal integrity.
The success of your organization doesn't depend on your understanding of economics, or organizational development, or marketing. It depends, quite simply, on your understanding of psychology: How each individual employee connects with your customers; how each individual employee connects with your company.
Ask yourself: Why do employees stay with one company when others are willing to pay them more? Why do some employees innately know how to deal with customer complaints, without alienating those customers? Why do some customers drive three miles out of the way to come to your store, when your competitor is right across the street from them? If you don't know the answers to these questions, you cannot maintain your margins.
Put another way, you must harness the power of human nature or you can never get down from the razor blade ride.
The extraordinary American economy of the last 50 years has been based on remarkable innovation and entrepreneurship. There is no substitute for these. However, in the new world of extreme competition, we are all going down the wrong path toward continuous margin erosion unless we discover a new way to manage human nature.