Business Skeptic

A second principal for effective and successful capitalism is the need for an educated consumer. Adam Smith’s capitalism assumes that consumers will act in a rational manner and attempt to maximize individual utility. Rational buying behavior requires an educated consumer, knowledgeable with regards to the domain and specifics of the transaction.

Unfortunately the practice of “educating” the consumer is more notable in its breech than its practice. The sub prime mortgage market is great example. The consumers lured into purchasing homes they could not afford were certainly not educated by the mortgage bankers. People need to attend school and pass exams to earn the right to drive an automobile, but no competency is required to go into debt for hundreds of thousands and risk one’s economic future. Capitalism cannot nor should it protect people from their own stupidity, but neither should it take advantage of it. An uneducated consumer should be helped and educated, not seen as a target market and exploited.

This goes back to the founding principal of Adam Smith’s “Wealth of Nations”. Capitalism must be build upon a solid foundation of cultural morality. Many notorious rip-off’s have hidden behind the defense of “the free market”. But think about it. Like selling mortgages to people who could not afford them, should be we marketing pharmaceuticals or health savings accounts directly to consumers that have no medical training. Watch advertisements and see if the seller is trying to educate you or overtly keep you from being “rational”.

The freedom to decide is a strength and virtue of our society and economy. However, along with such freedom comes responsibility. Do the right thing.

I am perennially concerned when management list’s growth as both a corporate objective and strategy and certainly there is tremendous pressure from Wall Street to show growth. However management must be cautious because growth is a metric, an indicator of the effectiveness of a strategy, not an objective. The important task is to define and manage a strategy which achieves the market and business objectives related to the unique strengths, assets and value proposition of the firm. If you focus and effectively manage strategy, then the growth metric achieved. In this context, growth is an indicator of the effectiveness of both the strategy and the execution of same. If the growth is below expectation, management must the analyze and contemplate 4 things:

1. The growth metric.. Is the growth metric consistent with a well executed strategy? Or are we trying to achieve something which the strategy cannot support.

2. Is the strategy sound.

3. Execution. Assuming the strategy is sound, are we executing effectively.

4. Time frame. Are we measuring on a time scale inconsistent with the effective execution of a sound strategy. Effective execution of a sound strategy might take longer than the measurement period.

The trap that many companies fall into is attempting to manage growth directly rather than using it as a metric and guidance. If growth rates are below expectation, immediate action is taken to achieve that growth, which might be both at odds with and disastrous to executive strategy execution. Specifically, compromises and inefficiencies are made to manipulate the metric rather than to address either the ineffectiveness or the mismatch between the metric and the strategy.

While these maneuverings may achieve the metric in the short run , because they ineffectively apply or divert resources and de-focus management from the primary mission, that of strategy development and execution, the growth even if obtained will not be sustainable. More importantly, focusing on the metric rather than understanding what the metric is telling you about your strategy and execution, will permanently weaken the firm and the market opportunity will be ceded to the competitor that stays focused on strategy and execution.

Many executives believe that growth is the elixir of success. That growth will protect them and their companies. Growth, used inappropriately, as an objective rather than a metric, can result in the opposite.

Growth is not an antibiotic it can be anaesthetic.