It were not best that we should all think alike; it is difference of opinion that makes horse races.

-Mark Twain

While reading an essay from Seth Godin’s “The Big Moo” I was struck by the concept being proposed that efficiency in business is being calculated in all too narrow a manner. Typically, we look at how we can streamline our processes- remove any and all waste, come up with uniform ways of doing things, and then calculate our efficiency solely based upon the resources we put in and the output we get based on said input. So a typical efficiency equation is we put in X resources (usually boiled down to a dollar amount) and we get back Y units of production in return. From a pure numbers standpoint, this seems to make a lot of sense. It is the justification used for offshoring jobs, moving manufacturing facilities, and for encouraging teams of workers that all think alike and do everything in the exact same way. Studies have shows that this type of environment will maximize your traditional efficiency.

How does this work in an ever-changing business world? Just ask the airlines, or telecommunication companies, or municipal electrical companies in California- the world changed on them, and they were stuck with very little diversity of thought in their organization. All that efficiency went out the window overnight when they found that their old line business practices just didn’t work anymore. The airlines still haven’t figured it out save for a few, telecommunication companies are offering the United States products that Europe and Asia passed by years ago, and our electric companies in California are stuck waiting for fractions of pennies on the dollar from fraud settlements with Enron.
Perhaps if they had not been so intent on maximizing efficiency in the traditional sense, they could have been more adaptable. One client of ours was in the mail order catalog business. They would send out X number of catalogs, and get Y orders in return. Sounds very traditional- they maximized efficiency on these offerings- to an extent. They also were constantly thinking of other business models, and encouraging diverse opinions from their employees. When they mailed a million catalogs on September 9th, 2001 their existing business model evaporated overnight when the mail shut down. Yet they were able to very quickly transform their business to one that is a telesales operation focused on Fortune 500 companies, and have an even more profitable business now than before. Had they completely maximized their traditional efficiency, they would not have tested new methods of doing business- and they would be out of business now.

How can one justify sacrificing efficiency when financial types will want to look at the black and white numbers of it all? We must reconsider what the equation used to determine efficiency consists of.

What if the change our organization faces were given a risk factor? Let’s call it R, for risk. This shall represent the downside- perhaps we have a 2% chance per year that the market will change drastically and our current business would no longer work. There might also be a higher percentage chance, say 20% that things will change to an extent that we must make changes in our business to keep up.

Now, the things that cause inefficiency in our business I will call F, for friction. Traditional business methods will stress minimizing F to the point it is eliminated. I would suggest that you keep a small amount of it around. Now, our efficiency equation becomes X (resources) goes in, and we get Y (output) minus F (business friction). I will call the efficiency E for short.
This can be stated as: E=(Y-F)/X. Now if we add the risk factor into the mix, we can figure out a way to actually increase our efficiency to the point it is greater than before we included risk and friction in the equation!
Let’s state that the efficiency only works in an unchanging world- so the left side of the equation actually becomes E (Efficiency) times the chance that things will remain unchanged, or 100% minus R. So our new efficiency equation can be stated as:
E*(100%-R)=(Y-F)/X. Which by simple algebra becomes E=(Y-F)/(X*[100%-R])

Let’s put some numbers in as a quick example. A factory spends $1,000,000 a year to produce 1,000,000 units. This yields a traditional efficiency of 1 unit per dollar. If they were to encourage some diverse practices, they may find that their yield goes down to 900,000 units for the same dollar amount, so their friction (F) is 100,000. If their risk factor is 20%, plugging this into our equation we get an efficiency of 1.125 units per dollar! 

This may appear complicated, and in some ways it is, but if you can find the proper balance of Risk factor and Friction in your business, you can not only avoid catastrophic business failures, but also be more adaptable to change.

All too often in business we strive for uniformity. Uniformity of thought, or practice, or opinion can be stifling to the ability of a business to adapt to the changing needs of the marketplace. So go out, find diversity in your business, and embrace it for what it is- an asset to your business.
 This article was written by SBA Network Sales Technology Specialist Matt Walker.  He may be reached at mwalker@sbanetwork.org

Posted in Business Planning, Uncategorized.

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