"Efficiency is taught as an unalloyed goal in the business world." Professor Roger R. Martin, writer, strategy advisor & currently #1 ranked management thinker in the world challenged the audience tonight with a summary of his essay on the high price of efficiency. 

His central premise was that business schools in particular but the broader economy have been on a 200-year-old love affair with efficiency. Efficiency as an end goal is an implicit assumption. 

Democratic capitalism's theory is that wealth will become divided along a standard bell curve - in which we tax the rich to fund the poor and the middle class largely net themselves out. This is why we strive to have a middle class in developing countries. 

Weight & height, for example, are distributed this way but we don't feel blame towards those taller or thinner than us for our body shape. Economies, he argued don't work like that; as people exert more pressure the distribution of wealth changes. Prior to the last 200 years, it was the poorest people in society whose wealth increased most rapidly but that is no longer the case and we have moved to and past a Pareto curve with wealth concentrated in the top 0.001% with an accelerating tendency. 

In retail, the theory went that you used algorithms to work out exactly how many staff hours were needed to achieve maximum profit with no staff hour wasted. Trader Joe's (similar to Whole Foods for my UK audience, although their PR teams may dispute this) staff their stores at 15% above that level because it makes their customers feel good. This is akin to the 3M policy of 20% time to do what you like (later copied by Google). These policies don't make short-term-efficiency sense but they are sensible medium-term plans for companies looking beyond the next investment or exit. 

Prof. Martin pointed out that of course we want efficiency but it needs to be balanced with resilience or we will have a crisis of democratic capitalism. Wealth becoming too concentrated has led to this being demonstrated recently with the Trump and Brexit votes.  

So why is efficiency the problem? It puts more and more pressure on what are otherwise normal distributions. As you do that it creates an ever more extreme Pareto effect. Instagram follower numbers are an example of this. The largest factor when deciding to follow someone is their follower number, creating an ever more extreme distribution of followers.  

He used an example of a firm who makes automotive, jet and residential oil. If the price of jet oil increases substantially the firm should not put all its resources into making jet oil because they have other markets that need to be serviced and when the jet oil price crashes they are at risk of bankruptcy. This he defined as resilience.

Prof. Martin concluded our definitions of efficiency are too narrow. Assuming we think democratic capitalism is a good thing, we need to think bigger picture, beyond business school and economic theory. Things which appear to be inefficient are often actually resiliencies and we need a more equal balance. 

Check out the upcoming issue of Harvard Business Review for Prof. Roger's article. It's fascinating stuff and will give you detail on my summary above. 

Thanks for reading 

#efficiency #economics #investment