Don't Stare at the Speedometer – Look at the Road
Efficiency is the Enemy of Strategy
How can you increase the "GDP per capita" in any country?
There are two ways:
1. Increase GDP
2. Reduce the population
At a recent strategy off-site I led, a debate arose: can a metric like payroll-to-revenue ratio be a strategic goal?
No, it can’t.
Any goal in the form of a fraction is about efficiency. But efficiency can’t be a strategic goal—with only one exception.
Robotic pizza
In 2013, the fast-food market looked archaic.
– Too much manual labor
– Too little automation
Alex Garden, who had worked for tech companies all his life, filed a patent for cooking food as it was being delivered. And in 2015, he co-founded Zume Pizza, a startup that received $445 million in investments but was liqudated in 2023 and became one of the biggest flops in Silicon Valley history.
Garden believed in efficiency and automation.
He built a company that made pizza with robots in a warehouse and then finished it the robotic kitchens on the wheels.
When you ordered a pizza, a bus full of complicated machines driven by algorithms began moving in your direction, finishing your pizza on the go.
Most commenters believe that Garden underestimated the complexity of the task. The quality of the pizza was poor. Robots required more investments to reduce costs compared with manual labor than Garden had expected, pushing the break-even point into an infinitely distant future.
But I think the startup failed for another reason. Zume Pizza offered too little value to end customers, and Garden was too obsessed with efficiency.
The pitfall of fraction goals
The board of directors of a certain company worried about efficiency. They demanded that the management team reduce the payroll-to-revenue indicator.
The team found a creative solution: they outstaffed the company's drivers. Technically, the drivers now worked for a contracting company, although they performed the same job. The payroll-to-revenue ratio improved, although the company's expenses did not decrease—they simply shifted to another cost category.
In 2009, Lisa D. Ordóñez, Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman published a scientific article titled "Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting."
I used a few ideas from the article for my book that my subscribers will receive for free in June.
The authors state that "aggressive goal setting within an organization will foster an organizational climate ripe for unethical behavior. That is, not only does goal setting directly motivate unethical behavior, but its introduction may also motivate unethical behavior indirectly by subtly altering an organization’s culture.” We also discussed the pitfalls of big strategi goals here.
Any goal in the form of a fraction has a numerator and a denominator. Employees can game the system by manipulating either one.
But that’s not the main thing.
Efficiency is not a business goal
It’s a condition under which the goal must be achieved.
When you’re driving a car, the speedometer shows your speed; it’s one of the efficiency metrics. But even in motor racing, speed isn’t the goal.
A strategic goal is always about customers. We should attract them by identifying their needs and creating value for them so they buy our products.
Business success always starts with that.
Profit growth through cost-cutting is not a success; it’s a delayed agony.
Success can only be achieved through customer satisfaction.
However, since customers are not the only stakeholders, and shareholders have their own interests, this goal should come with conditions.
For example, it may be business growth, but with the condition of maintaining costs at a reasonable level.
Say: “Increase the number of satisfied customers by X%, thereby increasing revenue by Y%, while maintaining the 'cost-to-revenue' ratio at Z%.”
Efficiency is not a business goal but a requirement for how it is reached.
Set a goal for everyone in the form of a resource-to-result ratio, and you will see – everyone will work only on the resources.
It’s much easier.
Zume Pizza offered little additional value to customers.
The delivery was a bit faster, but it wasn’t that significant for pizza lovers.
Even if Garden reduced labor costs significantly, it wouldn't make pizza radically cheaper.
Garden’s robots left customers indifferent. They didn't need robots; they needed pizza.
Customer first, efficiency second.
The only one exception
Efficiency may be your primary goal only if cost leadership is your strategy.
Low-cost airlines or discount stores should save every penny.
Once, Michael Dell, the founder of Dell Inc., and a few of his employees came to a supplier's office to negotiate. They were offered coffee with some sweets, but Dell said, "Take the sweets away and give us a discount on the same amount."
Most likely, it’s a fictional story.
However, Dell built his empire because he relentlessly fought with excessive costs.
Companies that stick to a cost leadership strategy offer only one value to customers – a low price.
Others should be more creative and inventive.
Read also: Customer Feedback Is (Almost) Useless.
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Svyatoslav, what does your company do and what do you prioritise beyond efficiency?
The quoted paragraph from Ordóñez, Schweitzer, Galinsky, and Bazerman's "Goals Gone Wild.." article is very pertinent, and highlights the importance of thinking through what's measured and the implications (intended and otherwise).
I have seen examples where measures have influenced behaviour and deflected effort and focus from more fundamental strategic goals; including where measures have been so diluted from the underlying intent that the latter has been lost as people just meet their obligations to report what has been asked of them. Devising the right strategic measures is crucially important.