In vs Amazon, I had cited Simon Andrews’ article – it might be “easy” to get about $50m, the journey to $100m and beyond gets tougher because efficiencies start maxing out. In this context, “efficiencies” relate to acquisition when building a DTC business. It led me to think of “maxing out efficiencies” in the broader context of the organisation and the business environment it operates in.
Is that even possible?
Can the efficiency of an organisation max out? If efficiencies in acquisition are maxing out, it means that the spends to acquire (CAC) and retain customers are not met by the revenue gained from them (LTV). Sure, the organisation would try to trim some costs, but how much can that scale? So arguably, we could stretch the efficiency maxing to a business level. Yes, addition of product lines with higher margins and up/cross sell, but how can that be made a sustainable advantage?
Additionally, the bigger an organisation becomes, the higher the probability of silos. When each of them work towards becoming more efficient, it might be at the cost of the overall efficiency. This is especially so because resources including budgets and say, tech resources for implementation, are limited. It therefore becomes quite easy to convert the internal journey of efficiency into a zero sum game!
Should scalable efficiency be the goal?
This post on Farnam Street makes an excellent case for efficiency making us fragile. Efficiency can be great when the environment is stable, but is hardly the case for any business today. Inefficiency, on the other hand might help discover paths that could lead to the same goal, and useful in an environment which does not support the hitherto efficient methods. Inefficiency, therefore, is not to be confused with ineffectiveness.
Not to mention “intellectual debt”, a wonderful concept I picked up from an article on automated thinking. It’s possible to discover what works without knowing why it works, and then to put that insight to use immediately, assuming that the underlying mechanism will be figured out later. As automation spreads across the various domains of an organisation, and efficiency is the only goal, the non-obvious trade-off is the ability to think and make decisions based on first principles.
That leads to the obvious question, what is the alternative?
Building an alternative
An alternate to both scalable efficiency and intellectual debt is scalable learning. (Arguably) scalable efficiency is built on institutionalising knowledge, and again, that can work well in a stable environment. But when the environment is not stable, the ability to think, execute, fail/learn, regroup is more crucial. Developing knowledge becomes more important than sharing. This is a subject John Hagel has been writing about for a few years now.
The link above has excellent thoughts on how to build organisations based on scalable learning principles. Another excellent framing and application method I (re)discovered recently is Venkatesh Rao’s “Leak-before-fail“. A type of built-in inefficiency in the system, controlled slack. Extrapolated, this leads to a larger principle – designing for economies of variety – thus creating a potentially anti-fragile system.
The way I see it, scalable efficiency, and the economies of scale lean towards being a zero sum game, scalable learning and economies of variety, on the other hand, can help create a non-zero sum game.