Volume 181: The Efficiency Delusion.

The Efficiency Delusion.

tl;dr: And the false Gods of Moats, Flywheels & Category Creation.

According to a recent Forrester report, the quality of customer experience delivered in the US has dived to an all-time low. A paltry 3% of consumers believe corporations to be customer-obsessed and to put their customers' needs front and center.

Meanwhile, over in Gartner-land, they’ve discovered that marketing budgets have dropped from a rolling average of 11.4% of revenue in the four years preceding the pandemic to just 8.2% in the four years following its peak, with an ongoing downward trendline. While this may not seem much at face value, an almost 30% decline over such a short period is huge. That’s 30% fewer resources pointed at growing the company, understanding your customer, keeping an eye on the competition, innovating the product, improving the experience, etc.

Now, while the stated goal is, as always, to “increase productivity” and “do more with less,” the reality on the ground is austerity and privation. A staggering 76% of marketing leaders believe they cannot achieve their business objectives because they lack the necessary resources to do so.

Ask any executive to take a 30% haircut, and I can confidently state that they’ll all say the same, irrespective of the business function they’re responsible for.

As an aside, I am now witnessing the effects of this daily. I’ve never seen so many marketer clients worried about burned-out teams being spread way too thin while being put under extreme pressure to pull off miracles on a shoestring.

Is it a coincidence that customers feel the way they do at the same time that marketers are feeling the way they do? Absolutely not.

Efficiency and its twin, productivity, have always been a hot topic for business. Way back in the 1880s, Frederick Taylor began introducing concepts that ultimately became known as “scientific management” (also known as Taylorism). It was his idea that business should be driven by analysis, logic, empiricism, and rationality—long-enduring cornerstones of management theory to this day. However, his longest-serving legacy is probably his supreme focus on eliminating wasteful activities.

It’s impossible to underestimate Taylor and his disciples' influence on how the world has operated ever since. Instead of looking at the world through a lens of what is possible, Taylor's most enduring influence has been to make us look at it through the lens of the waste that can be cut.

Fast-forward a hundred or so years, and in the 1990s, Taylorism re-emerged under a new guise of “business process re-engineering.” The big difference was that BPR posited that you could have your cake and eat it too—improve customer service, eliminate waste and cost, and become world-class competitors to boot. While there was certainly some truth to this, in many cases, it was just spin; the actual purpose of BPR was to eliminate headcount to increase earnings per share and drive up the stock price. As a result, it should come as no surprise that the big shift toward executive compensation being linked to stock price almost exactly mirrors the introduction of BPR consultants.

Again, as an aside, I once had a boss who’d previously been a BPR consultant for Cap Gemini in the 1990s before he burned out and got out. While feeling particularly melancholy in a bar one evening, he told me his nickname had been “Dr. Death” because of how many jobs he’d been responsible for eliminating. I can’t remember how many thousands of people he said he’d had a direct hand in firing, but it was a lot.

Ultimately, BPR's most enduring legacy has been the elimination of management hierarchy, which led directly to the flat structures we see today. If any of you feel like you’re managing too many people with too little time and too little management experience to do it well, then BPR is why.

While the marketing function largely skipped the BPR era upon its introduction, the advent of “digital” changed everything. Put simply, digital turned marketing into the drunk arriving late to the efficiency party with the sole intent of getting drunker than anyone else faster than anyone else. I’ve written before about how tech firms weaponized perceived waste to drive their own growth at the expense of marketing as a business function, so I won’t cover it again here. Suffice it to say that they did, they’re still doing it, and we’re still suffering the consequences of it.

Aside from waste and efficiency, though, the thing that linked both Taylorism and Business Process Re-engineering was the overarching belief that efficiency was necessary for corporations to be more competitive. At their core, both philosophies hewed to the fundamental capitalist ideal that winners and losers are dictated by how well they navigate the cut-and-thrust of competitive markets.

Today’s version of efficiency is different because the underlying philosophies being hewed to in the C-suite are different. Where being a better competitor used to be the goal, today’s predominant view of strategy is that competition is to be avoided at all costs in pursuit of becoming “a category of one.”

Why is customer experience at its lowest ebb in a decade? Because in a world where we pursue a competitor-free strategy, it doesn’t matter. Customers will have to buy from us regardless of how bad we make it for them. Why reduce marketing spend to privation levels? Because it’s unnecessary in a world where people simply cannot avoid buying from us.

Sound delusional? Yes, because for the majority of corporations, it is. But walk through the rhetoric for a second, and you’ll recognize that competition avoidance has become ubiquitous in how businesses think and, as a result, directly impacts how corporations allocate resources, e.g., are spending money: “investments” and cutting: “productivity enhancements,” irrespective of whether or not it makes sense.

Have you heard the terms “moat,” “flywheel,” or “category creation” recently? If so, congratulations. You just met the false Gods of contemporary business strategy. Every corporation on earth is currently seeking a moat, which has come to be defined as a structural advantage so great that no competitor can ever catch up. They’ve become obsessed with flywheel business models, which essentially means having a business that can cross-subsidize another business to the extent that nobody else can afford to compete. And finally, we have category creation, which means inventing a new category and then quickly riding a wave of exponential growth that no one else can catch.

The insidious thing is that only about five corporations on earth have ever successfully unlocked all of the above; each is now worth more than $1trn, and each is under (to varying degrees) antitrust scrutiny for illegally monopolizing one or more categories. More importantly, each got there through varying degrees of unrepeatable luck, vision, hard work, and, frankly, illegality. (For one example, merging to form a monopolist is illegal; it’s just that from about 1980 to 2020, the relevant authorities took an exceptionally laissez-faire approach to monopoly-creating mergers, especially in tech, which had a direct and outsize impact on the success of the likes of Google and Meta. Google, in particular, is about to go through some things.)

In other words, for 99.99% of everyone else, there aren’t obvious structural moats, there aren’t available flywheel business models, and category creation is more an exercise in self-referential rhetoric than anything real.

However, most businesses are like rats following the pied piper. In the late ‘90s, the pied piper was GE. Everyone wanted to be just as Six Sigma efficient and to cut that ten percent of underperforming staff every year so they could mimic its stratospheric success. In the 2000s, the Pied Piper morphed into Apple, an innovator with great customer experience design and an outsized business valuation. And today, everyone wants to be like FAAMG: A dominant, unregulated monopoly valued in the trillions that’s so powerful that it doesn’t even have to bother thinking about competing.

As a result, the dogged pursuit of non-competition riches by those who’ll never get there is materially impacting resource allocation, which directly affects customer experience and marketing.

As an example, corporations today, even those well outside of tech, invest an outsized amount in software engineers. They’re not asking them to do more with less, and they’re not demanding greater productivity. Why? Because they believe that software engineers will unlock structural advantages that others will never be able to copy. Right now, every car company is desperate to turn their vehicles into recurring subscription revenue businesses. Consumers hate it, but the automotive industry doesn’t care. Why? Because every driver of every car they’ve ever sold is now a potentially captive market. Customers will have no choice but to pay monthly for that heated seat or whatever function they’ve decided to turn into a subscription. This is why the people in charge of software at GM were poached from Apple, no doubt at very high cost, while I guarantee that GM would never in a million years consider doing something similar for a CMO.

Now, this isn’t random bitching about software engineers. I’m simply using this as an example. The real point is that because we’re currently living in a delusional moment relative to strategy formulation, competition, and what it takes to win in a category, we’re seeing critical competitive functions such as marketing and customer experience being deprecated while the technical pursuit of structural advantage expressly designed to avoid competition is being heavily invested in.

And that, my friends, is the very definition of an opportunity.

I talked last week about Nike and Starbucks' failings. Both appear to have pursued competition-avoiding strategies gone awry. And, as a result, others have stepped in to take advantage. On Cloud and Hoka would be nowhere without Nike giving up shelf space in retail, for example.

It’ll likely take a while to happen, but as sure as the rain eventually falls, corporations are going to begin getting the message. They will see that deprecating marketing and customer experience places an untenable drag on performance. They will witness competitors blowing up spectacularly in failed attempts to build moats, flywheels, and new categories. And the essential creative destruction of capitalism will step in and fill the void with a new generation of competitor.

I honestly can’t wait. Because what we’re witnessing right now is ugly, and it will get uglier before it gets better, as many previously great corporations lose their way in the delusional pursuit of silver bullets that simply don’t exist.

In the meantime, most of us should be wary of the pursuit of moats and flywheels and new categories and instead focus on doing the hard yards of figuring out how to delight the customer and out-compete the delusional.