INTERVIEW: Industry’s Obsession with Economic Efficiency Can Be Problematic

31 May 2021 - In 2020, during the early months of the COVID-19 pandemic, the world’s dependence on complex global supply chains was questioned. Now, however, as vaccination programmes have taken off in some countries and rolled out slowly in others, even deeper doubts about globalisation and the capitalist system have been raised.

In a recent article, Mihir Swarup Sharma, a Bloomberg Opinion columnist, explains that the capitalist system is supposed to manage production better than any other system by matching supply and demand: “Productive capacity is built, not wasted. Buyers and sellers are connected. Innovation thrives and benefits everyone. But, right now, that’s not the case. This isn’t about inequality, which we always knew capitalism could create. It’s about inefficiency, which capitalism is supposed to avoid,” Sharma says.

The COVID-19 pandemic has only made the need for a structural transformation of industries even more visible. The animal nutrition and health sectors also need to take note.

Part of the animal nutrition industry’s mission is to help deploy technology for the benefit of producers and for the overall value of the agri-food chain. It is becoming increasingly important to talk to customers, understand them better, and help them deal with their pain points, rather than focusing on efficiency for efficiency’s sake and only seeking to maximise shareholder value, which can be short-sighted practice.

11 years ago, in “The Age of Customer Capitalism” (Harvard Business Review, 2010), Professor Roger L. Martin wrote that “it is time we abandoned shareholder value and made the shift to a third era: customer-driven capitalism… Determining what your customers value and focusing on always pleasing them is a better optimisation formula.”

Prof. Martin is a writer and strategy advisor, and in 2017 was named the #1 management thinker in the world by Thinkers50, a biennial ranking of global business thinkers. He is a trusted strategy advisor to the CEOs of companies worldwide including Procter & Gamble, Lego and Ford. He is a Professor Emeritus at the Rotman School of Management at University of Toronto where he served as Dean from 1998-2013. He received his BA from Harvard College, with a concentration in Economics, in 1979 and his MBA from the Harvard Business School in 1981. Prof. Martin also grew up in the animal nutrition world as Canadian feed manufacturer Wallenstein Feed & Supply Ltd was founded by his father in 1958.

Feedinfo recently discussed some of the ideas outlined in “When More Is Not Better” with Prof. Martin. The conversation below between Prof. Martin and editor in chief, Simon Duke, has been edited and condensed.

[Simon] In your book, you evoke “reductionism” – the way certain business executives break down their companies into divisions (or pieces) and seek to optimise each piece under the assumption that the pieces can be added up to produce a productive whole. This narrowing can be handy and makes jobs/operations much easier to define, but at the same time it creates a machine that makes employees interchangeable and their true values somewhat constrained. What are you telling executives about possibly turning their companies into what you call “complex adaptive systems”?

[Roger] First, I’d just like to give a little context. Over history, sizes of businesses have evolved. To start off with we didn't have very many big companies. But as companies got bigger there was more of a challenge. There were big, sprawling empires, whether it be a Rockefeller or Vanderbilt empire in the early 20th century, and so there was a need for “how do we?” and “how do we manage this?” So, they segmented. There's sales and manufacturing, finance, etc. And then you develop those areas of specialty.

On top of that, the business education system came to life and organised itself around these disciplines. And so, you had this sort of reinforcing loop as companies got bigger, and the way to deal with the business was to have domains of knowledge. Business education itself went deeper and deeper into the domains of knowledge, so that to become a faculty member you had to have expertise in one of these domains. But there was no requirement whatsoever for you to know anything other than your one domain. So, in some sense it's sort of a convenient way of dealing with business. People hoped that if you're good enough in each of the domains they'll somehow add up together. There's a great fascination with deep knowledge domains and people wanting to have and develop them, as if these knowledge domains aren't compatible with one another. There is a belief that if you have deep domain knowledges, they will naturally add up to a good result. In the world of business, it isn’t so simple.

You have to recognise that it is complex and an adaptive system. Don't imagine that you can separate it into pieces and reassemble them. You have to think very hard and make your best guess as to how the pieces fit together so you can ask yourself the question ‘How does what I'm doing in marketing relate to what I'm doing in operations? How does what I'm doing in finance relate to what I'm doing in marketing?’ Because it's complex, you're never going to be able to figure all of that out. But if at least you're trying, you'll have a better chance.

In my book I give the example of Isadore Sharp, the founder of Four Seasons Hotels and Resorts, saying that “the only way that we're going to get our employees to treat our guests the way we want them to treat our guests, is to treat our employees like guests.” This is the opposite of reductionism. With that in mind, you would think that the most important person after the CEO would be the EVP of service, right? That would be a reasonable assumption. But they don't have an Executive Vice President of Service or anybody with that type of role. That’s because service is everybody's job. That's saying we're not going to fix this by reductionism. We're going to fix this by essentially going in the opposite direction. Now you have to have confidence to make that bet. You need a recruiting system, training system, a compensation system, to support that. The system will adapt. People adapt, and that's why you have to keep shifting and changing things.

My advice is to get the various parts of your business talking with one another. Don't have one on one meetings. Try to coordinate. Rather build this understanding of the team, of how what they're doing relates to other people on the team. Present them with the clear view that you as CEO are always wondering how the pieces fit together and how one thing relates to the other just by your actions and they'll get it over time.

[Simon] Roger, you grew up in the animal nutrition world. Wallenstein Feed & Supply Ltd was founded in Ontario in 1958 by your father. And your brother Rick today serves as General Manager. You pride yourselves in serving independent farmers. In which ways is Wallenstein Feed & Supply a complex adaptive system?

[Roger] My father managed Wallenstein as a complex adaptive system. The salespeople worked with a price list which was provided every Monday morning. They always stuck to the price list. No ounce, let alone ton of feed, was sold at any price other than the one published on the price list. He would tell me, “Roger, here's the way I think about it… As you know, farmers always want a good deal. And if they think that the price is negotiable when our salesperson goes to visit them to talk about the quality of the feed, animal health support, quality and other topics, they'll end up talking about price the whole time instead.” My father understood that there is a relationship between pricing, strategy and what goes on in a sales call, and wanted to drive adaptation in the way he preferred. If price is negotiable, then the adaptation is to spend more of the sales call on pricing. If it's not negotiable, the adaptation is to spend time on the services.

Also at Wallenstein, we have what I call the ‘Taj Mahal’ of truck cleaning facilities. We have this giant sophisticated precision cleaning facility equipped for big 18-wheelers and it required a large investment. I asked my father about the rationale behind that investment, and he said, “Roger, you know farmers are really extremely sensitive about running out of feed because they know if they actually run out of feed even for a day, it will throw the animals off for weeks. So, delivery is of the essence. If the farmer sees that every time a Wallenstein feed truck delivers, and that it is bright, shiny, and clean, they'll be comforted in knowing that Wallenstein is taking really good care of its trucks. It's going to deliver when it says it's going to deliver. It’s about perception and that's again, a complex adaptive system. Our truck cleaning policies will cause the farmers to think this, which will give them more confidence in Wallenstein.

All sorts of things relate to customer feeling satisfied. So, what I say to executives is to understand the adaptation that you would like to have happen and design your system in that way.

[Simon] You also argue that “slack” isn’t the enemy of a company. Companies shouldn’t be chasing zero slack to get rid of inefficiencies but instead they should be seeking an optimal level, be it in their costs or production operations. What are the opportunities that can be created by managing slack rather than eliminating it?

[Roger] Think of slack for a hospital as having an extra stack of PPE masks in the supply rooms, just in case. Slack is something we don't need on a daily basis, but if something happens and there's an upward shift in the demand. It applies to objects like PPE as well as to staff. There's a notion of Statistical Process Control (SPC) that says you should understand the control limits. Your system will work within the control limits. Modern business has sort of said that slack isn’t efficient and wants to reduce costs. In the case of COVID-19, extra staffing is the thing that was considered as slack, pre-pandemic. Retail experiences today aren’t those of 10-20 years ago. Today, the likelihood of finding somebody who can help you find what you want quickly and efficiently has become smaller. You end up very often running around the store to find somebody. That member of staff is usually serving another customer and you have to wait until they’ve finished answering that person’s question to hop on them on them quickly in the hopes that you will actually get some help. Retailers have generally eliminated slack. And so begs the question, is slack elimination the efficient thing to do? Dr. William Edwards Deming, the engineer, statistician, management consultant, said an optimal amount of slack exists. You have to think carefully about what's the cost of not having slack versus the benefit of having slack and cost control. Costco, arguably America's hottest retailer today, makes a point of having extra staff in stores. This is not explicable by any algorithm because they just want to make sure that customers find what they want, feel good about the Costco experience, and keep coming back. Their sales per square foot and profit per square foot are off the charts versus their competition. That is having slack in your in your system.

[Simon] In your book, you discuss why monopolies aren’t good for any industries because drive for improvement fades away and businesses become less sustainable and less resilient. Why do you think it’s healthy to have aggressive competition rather than have companies driving each other out of business?

[Roger] Monopolies can really damage an industry. They are self-destructive. Entities wanting zero competition, agreeing on prices to raise profitability, well that is unsustainable activity. Any company that puts their own interests ahead of the customers will be doomed to eventual failure. A sustainable business is one that is designed to benefit everyone over time. If your company isn’t sustainable, customers won't trust you. Customers will look as aggressively as possible for some other alternative than having to do business with you. The ultimate danger is being a monopoly because you can. Then you can do anything you damn well please to customers and that's a sad thing.

If you look at the Dow Jones 30 and just look who's been there for longest, it's companies that have really vicious competitors. Monopolies come and go. And even though I think it's kind of hard to imagine Google and Facebook going, I think they are behaving in ways that may cause them to go. And one of the ways they can go is by behaving sufficiently egregiously that governments get involved and tie them into knots. That's what happened to IBM. I advise companies to be sustainable to the extent that they put their customers' interests ahead of theirs. And then figure out how to make a buck doing that. Eliminating competition is just not something that is worthwhile to focus on.

[Simon] And in terms of merger and acquisition activity, there's quite a lot of consolidation going on in the animal nutrition sector. There has been a change in mindset. It's no longer about requiring volume, it's more about acquiring additional expertise and technology. It's more about collaborations and partnerships. That seems to be the name of the game right now.

[Roger] There are mergers and acquisitions that are intended to make the company more capable of serving its customers. And there are mergers and acquisitions designed to give you more power over customers. It depends. I think antitrust authorities are being incredibly lax on the latter camp, and they should be much more aggressive. What is worrying is the so-called efficiency defense companies have in mergers. In the US and in the EU, you can defend a merger on the basis of it increasing efficiency. That’s not right. There's been some kind of perversion of antitrust legislation, which is there normally to help companies, prevent them from doing things that will make them less sustainable.

[Simon] Back to Wallenstein Feed & Supply. How did the company thrive while remaining independent?

[Roger] My paternal grandfather owned a general store across the street from our house in Wallenstein. He and my father used to bag the feed themselves that they would buy from Ralston Purina or Shur-Gain. There was an abandoned feed mill just down the road which my father bought in 1958 and put back in operation. It all started as a tiny feed mill. My father had this view of how you serve customers and putting in place a system of selling where customers trust you. They chose to remain independent as opposed to the very big companies wanting to dominate the industry. He played off that a little bit, arguing that if you're an independent farmer and you prefer not to buy from the people who are trying to take over your industry, you can buy from us. His view was that we were in business to serve the farmers. He was always great with employees. And we just expanded slowly but surely and built bigger and more efficient mills. My brother Rick came into the business in 1981 and computerised everything. And now the feed mills are completely automated.

I think the spirit has been customers first. And you take care of your employees and you treat it all as a complex adaptive system. You relentlessly work to make yourself more efficient on behalf of the customers. My father never cared much about making money. The business makes lots of money, but he used to pay himself a pittance. He just plowed all the money back into the business. He never had his own office and would say that there's always at least one salesman's office that's empty, so he’d just use whatever salesman's office was available.

I always said I learned more at the kitchen table then I learned at Harvard Business School. It was a good education.