 "<b>Book Extract:</b> Competing on price")
The Triangle Shirtwaist Factory fire in the twentieth century and the Rana Plaza collapse in the twenty-first both derived from the remorseless logic of competition: anything you can make cheap, I can make cheaper. Bangladesh has the lowest labour costs in the world, with the minimum wage for garment workers set at roughly $37 a month. For a consumer to get a bikini from H&M or Walmart for $4.99, costs have to be very low. So wages go right down and safety considerations disappear. This is what economists call the race to the bottom.
Companies like Li & Fung accelerate this race. Acting as a broker between low wage factories and the companies that seek to use them, Li & Fung searches constantly for cheaper labour markets. These days, sub-Saharan Africa is starting to appeal. Sourcing cheap labour is no small-time business - last year, Li & Fung earned $20 billion - and, in theory, brokers like this are supposed also to monitor working conditions. In reality, this poses an impossible conflict of interest. In 2012, Li & Fung was responsible for garments made at Tazreen Fashions, where 112 workers were killed in a fire, having been told to keep working after alarms sounded. But every penny a factory can squeeze from their costs makes them more attractive and eligible to win big contracts.
The problem with the race is that costs do not - cannot - simply vanish; they have to go somewhere. And so mostly they are shifted from those who have power and money to those who have nothing. The cost to the customer of the bikini may be just $4.99 but the cost to its maker is a working day of 14-16 hours, seven days a week in cramped and hazardous conditions. Fires, exacerbated by locked fire escapes, are frequent. Safety is an easy, invisible thing to cut because it might never matter and, when it does, it's too late. As far as possible, the risks of cheap manufacture have been passed down from the corporation to the local contractor, who passes them down to the individual workers. The garment can only be so cheap because its makers and the society they inhabit absorbs the cost of its manufacture. Economists call this externalization: getting costs to move outside the business.
In a less dramatic fashion, you can see this by looking at cheap airlines like Ryanair. When accountant Michael O'Leary took over the running of Ryanair, the first thing he did was run through expenses and eliminate them. The costs of food, luggage, boarding passes and travel agents were all nimbly shifted out of the Company - onto the consumer. Costs weren't, in fact, being taken out; they were just being moved. The most palatable (and wholly disingenuous) way to present this is as a choice: you have the freedom to choose whether to bring luggage; you have a choice whether to book by phone or online. In reality, you pay for it all. Theoretically the garment workers of Bangladesh have the choice whether to turn up for work or not; in reality, they have no choice to run away when doors are locked.
The competition to drive down costs has become endemic across all industries but perhaps nowhere is it more alarming, and its costs more obvious, than in healthcare. In the belief that competition drives quality and value, many NHS contracts have been put out to tender: essentially a reverse auction in which services win business by charging the lowest price. When the NHS Direct helpline service was put out to tender, successful bidders could keep their prices low by using inexperienced call handlers. But since they lacked medical knowhow, all they could do was follow a script of questions and answers. If they couldn't find a clearcut answer, patients were told to go to A&E or call an ambulance. For the contractor this was a quick, cheap result but, for the NHS, this turned out to be overwhelmingly the most expensive option. And when, in August 2013, providers found that they had bid too low to be able to provide a functional service,, they pulled out, leaving the service neither reliable nor trusted.
In a painfully similar scenario, when the security firm G4S found, late in the day, that it could not provide the security guards it had promised for the Olympics, the costs were conveniently externalised to the taxpayer, who funded the military stepping in at the last hour. Competing on price while offering a critical service necessarily produces systems that are too efficient not to fail. All the redundancy, the margin for error or change - in other words, all the risk - has been stripped out, to be borne by others.
That competition provokes these rash promises is obvious in competitive tendering. But the competition to drive down wages and keep them there can be seen across entire countries.
A BIGGER PRIZE: WHY COMPETITION ISN'T EVERYTHING AND HOW WE DO BETTER
Author: Margaret Heffernan
Publisher: Simon & Schuster
Price: Rs 999
ISBN: 9781471100758
Reprinted by permission of Simon & Schuster. Copyright 2014 Margaret Heffernan. All rights reserved.
Collaboration, not competition, makes businesses grow: Margaret Heffernan
The impact of increased competition has been an epidemic of cheating, plagiarism, retraction and fraud, Margaret Heffernan tells Ankita Rai
Business is not a zero-sum game, and competition creates opportunities. However, in the book you write that competition crushes innovation in a company. Why is it so?
Classic economic theory argues that competition provokes the creation of new and different products and services. This is good for consumers because it represents choice. It is healthy for markets because it diversifies risk. But it doesn’t always work this way. The economic crisis proved so devastating because the banks were not creating different products and services; they were just copying one another. One bank leader I spoke to explained it this way: “Sub-prime was about ripping off poor people. But here’s the thing: to function as a business, we have to employ a sales force. It was hard to recruit salespeople. There was no way we could hire, let alone retain, a good salesperson if we weren’t prepared to let them sell sub-prime. They made huge commissions on these deals. To stay competitive, we had to let them sell sub-prime.”
Similarly, if you look at the drug companies, their record in innovation is lamentable. It is easier for them to copy one another, making what they even call “me-too” drugs. Despite rising R&D spending, the pharma companies aren’t any more innovative now than they were 50 years ago.
What are the situations in which competition doesn’t work?
Competition produces ‘arms races’ where companies strive to be bigger and bigger — until they become fundamentally unmanageable. This is what happened when RBS, through its acquisition of ABN/AMRO, strove to do the biggest deal in banking history to become the biggest bank. It now carries a gigantic amount of debt and suffers periodic service breakdowns. This also happened at BP after the John Browne’s aggressive acquisition loaded the company with enormus debt. Research shows that 50 to 80 per cent of mergers do not work — but the competitive urge to get bigger drives companies to do these deals against the odds.
Please explain how collaboration creates stronger and innovative businesses?
For companies to be creative, they need a culture in which people can share ideas easily. This specifically doesn’t happen when (in the case of over 50 per cent of companies) employees are assessed and placed into a forced ranking, which determines their bonus. Many of the world’s successful businesses just don’t work this way. Take Arup, the world’s leading structural firm. It operates on three principles: excellence, honour in the way people are treated, and reasonable prosperity. Forty per cent of the firm’s profit is divided each year among the entire staff and the company has never had a single year of losses. The company is famous for having a flat hierarchy and shared sense of mission. Take the carpet firm Interface, which decided to eliminate environmental damage from its processes. This — not competition — has made the firm grow.
Companies like Li & Fung accelerate this race. Acting as a broker between low wage factories and the companies that seek to use them, Li & Fung searches constantly for cheaper labour markets. These days, sub-Saharan Africa is starting to appeal. Sourcing cheap labour is no small-time business - last year, Li & Fung earned $20 billion - and, in theory, brokers like this are supposed also to monitor working conditions. In reality, this poses an impossible conflict of interest. In 2012, Li & Fung was responsible for garments made at Tazreen Fashions, where 112 workers were killed in a fire, having been told to keep working after alarms sounded. But every penny a factory can squeeze from their costs makes them more attractive and eligible to win big contracts.
The problem with the race is that costs do not - cannot - simply vanish; they have to go somewhere. And so mostly they are shifted from those who have power and money to those who have nothing. The cost to the customer of the bikini may be just $4.99 but the cost to its maker is a working day of 14-16 hours, seven days a week in cramped and hazardous conditions. Fires, exacerbated by locked fire escapes, are frequent. Safety is an easy, invisible thing to cut because it might never matter and, when it does, it's too late. As far as possible, the risks of cheap manufacture have been passed down from the corporation to the local contractor, who passes them down to the individual workers. The garment can only be so cheap because its makers and the society they inhabit absorbs the cost of its manufacture. Economists call this externalization: getting costs to move outside the business.
In a less dramatic fashion, you can see this by looking at cheap airlines like Ryanair. When accountant Michael O'Leary took over the running of Ryanair, the first thing he did was run through expenses and eliminate them. The costs of food, luggage, boarding passes and travel agents were all nimbly shifted out of the Company - onto the consumer. Costs weren't, in fact, being taken out; they were just being moved. The most palatable (and wholly disingenuous) way to present this is as a choice: you have the freedom to choose whether to bring luggage; you have a choice whether to book by phone or online. In reality, you pay for it all. Theoretically the garment workers of Bangladesh have the choice whether to turn up for work or not; in reality, they have no choice to run away when doors are locked.
The competition to drive down costs has become endemic across all industries but perhaps nowhere is it more alarming, and its costs more obvious, than in healthcare. In the belief that competition drives quality and value, many NHS contracts have been put out to tender: essentially a reverse auction in which services win business by charging the lowest price. When the NHS Direct helpline service was put out to tender, successful bidders could keep their prices low by using inexperienced call handlers. But since they lacked medical knowhow, all they could do was follow a script of questions and answers. If they couldn't find a clearcut answer, patients were told to go to A&E or call an ambulance. For the contractor this was a quick, cheap result but, for the NHS, this turned out to be overwhelmingly the most expensive option. And when, in August 2013, providers found that they had bid too low to be able to provide a functional service,, they pulled out, leaving the service neither reliable nor trusted.
In a painfully similar scenario, when the security firm G4S found, late in the day, that it could not provide the security guards it had promised for the Olympics, the costs were conveniently externalised to the taxpayer, who funded the military stepping in at the last hour. Competing on price while offering a critical service necessarily produces systems that are too efficient not to fail. All the redundancy, the margin for error or change - in other words, all the risk - has been stripped out, to be borne by others.
That competition provokes these rash promises is obvious in competitive tendering. But the competition to drive down wages and keep them there can be seen across entire countries.
A BIGGER PRIZE: WHY COMPETITION ISN'T EVERYTHING AND HOW WE DO BETTER
Author: Margaret Heffernan
Publisher: Simon & Schuster
Price: Rs 999
ISBN: 9781471100758
Reprinted by permission of Simon & Schuster. Copyright 2014 Margaret Heffernan. All rights reserved.
| Author speak |
| |
The impact of increased competition has been an epidemic of cheating, plagiarism, retraction and fraud, Margaret Heffernan tells Ankita Rai
Business is not a zero-sum game, and competition creates opportunities. However, in the book you write that competition crushes innovation in a company. Why is it so?
Classic economic theory argues that competition provokes the creation of new and different products and services. This is good for consumers because it represents choice. It is healthy for markets because it diversifies risk. But it doesn’t always work this way. The economic crisis proved so devastating because the banks were not creating different products and services; they were just copying one another. One bank leader I spoke to explained it this way: “Sub-prime was about ripping off poor people. But here’s the thing: to function as a business, we have to employ a sales force. It was hard to recruit salespeople. There was no way we could hire, let alone retain, a good salesperson if we weren’t prepared to let them sell sub-prime. They made huge commissions on these deals. To stay competitive, we had to let them sell sub-prime.”
Similarly, if you look at the drug companies, their record in innovation is lamentable. It is easier for them to copy one another, making what they even call “me-too” drugs. Despite rising R&D spending, the pharma companies aren’t any more innovative now than they were 50 years ago.
What are the situations in which competition doesn’t work?
Competition produces ‘arms races’ where companies strive to be bigger and bigger — until they become fundamentally unmanageable. This is what happened when RBS, through its acquisition of ABN/AMRO, strove to do the biggest deal in banking history to become the biggest bank. It now carries a gigantic amount of debt and suffers periodic service breakdowns. This also happened at BP after the John Browne’s aggressive acquisition loaded the company with enormus debt. Research shows that 50 to 80 per cent of mergers do not work — but the competitive urge to get bigger drives companies to do these deals against the odds.
Please explain how collaboration creates stronger and innovative businesses?
For companies to be creative, they need a culture in which people can share ideas easily. This specifically doesn’t happen when (in the case of over 50 per cent of companies) employees are assessed and placed into a forced ranking, which determines their bonus. Many of the world’s successful businesses just don’t work this way. Take Arup, the world’s leading structural firm. It operates on three principles: excellence, honour in the way people are treated, and reasonable prosperity. Forty per cent of the firm’s profit is divided each year among the entire staff and the company has never had a single year of losses. The company is famous for having a flat hierarchy and shared sense of mission. Take the carpet firm Interface, which decided to eliminate environmental damage from its processes. This — not competition — has made the firm grow.