Cees Bruggemans: Consulting Economist Bruggemans & Associates
Cees Bruggemans: Consulting Economist Bruggemans & Associates



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What does the ideal business look like?

2014-04-17

One recognises a gap in the market and comes up with a product to fill it, or otherwise have a brilliant product idea after which one goes in search of markets.

In either case, it is off to the races, needing capital, hire people, looking for premises, acquiring transport, doing marketing, ad infinitum.

Call it in-sourcing.

This is the most likely approach, except in specific instances. Few stay for long an one-man band, especially when starting to gear up, having to buy in expertise and capacity from elsewhere. The natural inclination is to have it all under one roof, and to steadily expand the footprints.

The main reason for corralling the capacity inside the growing organization won someone a Nobel Price for economics many, many decades ago.

It has to do with negotiation costs.

It turns out that if you have all your resources under one roof, the cost of co-operating with each other in achieving the end result and thus getting things done is (much) lower than having all resources outside the corporate tent (total outsourcing) and having to negotiate each and every time, even informal talk, as to price, terms, legalities and also enforcement.

For many things one still keeps outside suppliers, but for crucial things one erects one tent (The Company) and it grows over time. There are definite benefits to such arrangement, such as lowered intra-business negotiation costs.

Indeed, young successful organizations tend to be the most dynamic and creative compared to giant old utility businesses. Just look at the present crop of global techies?

Now fast forward.

The product idea turned out to be brilliant, it wasn't an one-day wonder, other great product and market ideas followed, and the company grew large and even content, the owner of enormously rich franchises giving it steady wealth-creating opportunity over time.

Eventually in breezes a new crowd, who acknowledge the strength of the rich franchise but who notices that earnings growth and wealth gains have become associated with clear slack and slowing pace of evolving. The happy rich life tends to be laid back, rather than mean and hungry.

The protected life of The Company ultimately reduces the urgency to survive or expand, evolve, especially if the franchise is strong and not easily overcome by outside competitors.

With the new generation of owners and/or managers differently motivated, they become inclined to light fires under tired backsides. Cut costs, become more innovative, more aggressive, more everything. Load the incentives, wages, bonuses, options, and the best will come, the most hungry, having the competition for breakfast.

Indeed, create more internal competition, between individuals, between profit centres. Allow competing business models INSIDE the one corporate tent. Heat up the place until every pair of pants is on fire, everyone is having each other for breakfast, as the pace is hotted up far beyond imagination, and the earnings flow accelerates to amazing degrees, leaving most observers gasping.

Fine, so far, so good.

But what has happened here as well? The basis for least-cost intra business negotiation and resource allocation (the words "trust" and "co-operation" come to mind) has been destroyed, displacing it with a model of totally adverse, arms-length, multiple-purpose relationships, where individual maximizing is central.

Chaos, paranoia and anarchy reigns, personal insecurity has been maximized, just as in the larger market place. Indeed, the greater market place has been duplicated inside the tent, with the alleged benefits of business incorporation negated to zero, except for being able through size to raise the cheapest capital, negotiate regulations, win very large contracts or negotiate large supplier arrangements. And of course ownership.

Is that optimal over the long run? Or do the extreme manifestations threaten viability? How does a rich franchise stay rich, successfully counter disrupters, evolve?

Is a better balance not a better proposition, not unlike life-work balance, though difficult to achieve? How can this be managed, if at all?

Or is it all about the selfish gene? The Company is at most a Board of directors and an Executive team. And the rest are all independent little fiefdoms in maximizing mode?

Having evolution and co-operation under one roof may sound feasible, but if the behaviours have become deeply embedded one way or the other, it is difficult to mix these cultures. One can of course mouth these things, as people do daily, endlessly talking about organisational motivation, inspiration and loyalty, but a paranoid sick organisation is still sick, and like a sick building not easily made healthy.

Something to remember as you start a business or take over an older established one, sick or healthy. Or when you start your first job.
 
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website     www.bruggemans.co.za
Email     economics@bruggemans.co.za
Twitter   @ceesbruggemans
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What does the ideal business look like?

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