The Myth of Economies of Scale

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This is the 63rd episode of the Mind Your Noodles podcast. In this episode, we will discuss the myth of economies of scale. Sign-up for The 95 Method executive education program – free previews at Mind Your Noodles.com/free.

SHOW NOTES

[00:00:06] Mind Your Noodles Podcast -Episode 63
[00:00:27] Episode 63 – The Myth of Economies of Scale
[00:00:57] Theory of 150
[00:04:54] The 95 Method Update and Breakdown
[00:06:14] Economies of Scale

TRANSCRIPT

Tripp Babbitt: [00:00:06] Take care of the brains that take care of you with a Mind Your Noodles podcast keep you up to date on the latest neuroscience research and practices to keep your brain healthy and strategies to help your organization brain friendly.

Tripp Babbitt: [00:00:27] Hi, I’m Tripp Babbitt, host of the Mind Your Noodles podcast, and this is Episode 63 this week, I want to talk about economies of scale and I can’t talk about economies of scale without talking about diseconomies of scale. So we’ll get into that a little bit. Last week we did the theory of 150, which was actually something Malcolm Gladwell called the rule of 150.

Tripp Babbitt: [00:00:57] And it comes from. Some research that had been done about being able to connect with people up to 150 different people where you’d be if you met somebody in a restaurant, you you wouldn’t feel uncomfortable sitting down and having a beer with them. And that after you get to 150 people because we don’t have these relationships anymore.

Tripp Babbitt: [00:01:24] This is where complexity starts to enter organizations. You start to get to the size where people don’t know each other.

Tripp Babbitt: [00:01:32] And you have to have rules and policies and control and or so people think. And that’s typically the way that large organizations have decided to go, was to build control into their organization. So this is kind of a follow on to that, because there’s also this belief around the fact that whoever, you know, we get economies of scale as we grow bigger. They know that they’re there’s these efficiencies. And so I’ll be talking about that. But just a brief update on the 95 Method Executive Education Program. I still feel I’m on track that by the end of this month, I will have something to release available for purchase for. And again, it’s an executive education program, but it’s just kind of the foundational pieces as we build this training. This education system. And I think it’s very unique in the fact that when you go to a university or someplace like that, you are going to get the type of education are going to get from this this particular program. Universities are, too. Can I go to class and they teach us something. Then you go back to your work. And as I’ve found, having spent a little bit of time teaching at universities, is that a lot of the students say, you know, I don’t get anything that I can really take back and use. And this program, this education system is all about giving you something to do, not only working on your own organization, but for you to learn as you do.

Tripp Babbitt: [00:03:24] And this you know, I focus it on executive education, but it’s really for anybody that wants to get better at their job and maybe set themselves up as a CO two person that can help the organization get better. So that’s the way it’s set up. And so the the first modules that I’ll be releasing are all about synthetic thinking. And what this means is that we’ve grown up or we’ve gone through pretty much our entire work lives with analytical thinking. We know how to take things apart were very well. And you’ll see ads for jobs. Oh, you’re going to be a great analytical thinker type of thing. But the really the thing that’s really missing from the executives and really anybody within an organization is the ability to use synthetic thinking, which is how does how do we manage the whole because the whole of an organization is greater than the sum of its parts. And this gets away then from kind of the analytical thinking takes you to a whole new level to be able to take your organization into areas in which you’ve never looked before because you’re not thinking in those particular terms. So the ninety five method as we started into this executive education system.

Tripp Babbitt: [00:04:54] The first module is all about a customer lens.

Tripp Babbitt: [00:05:00] How do we look at our organization through the customer’s eyes? And this I my personal belief is that by virtue of looking through a customer lens, you almost become a synthetic thinker because you think about it when you’re in customer service or something like that.

Tripp Babbitt: [00:05:22] You’re calling customer service as a customer. You don’t care about all the rules and their policies and their procedures. And the only thing you really care about is am I able to get the product or service that I need for that particular call and that I can do it with the minimal amount of effort necessary, because then I hate when you have to go in and call the contact center and then they pass you off to somebody else.

Tripp Babbitt: [00:05:49] And then so, you know, it just goes on and on and it’s a nightmare.

Tripp Babbitt: [00:05:53] So being able to look at through that customer lens and then the other thing that the second major module then that I’ll be releasing is all about the thinking lens. How does your organization think? About things like control. Rewards.

Tripp Babbitt: [00:06:14] And one thing I’ll be talking about. And there’s probably good Segue is economies. How did your organization think about those particular things? And so when we look at things like economy of scale, having worked with organizations that have either been through a merger or some kind of post merger where they’re trying to move things together, this is where the heck call merger myths. And, you know, this thinking is is very prevalent, especially in financial arenas where they say, oh, you’re going to get this merger and you’re going to, you know, make the company so much more efficient and the prices are going to be lower and they’re going to they’re going to have more money to invest and increase, invest and and increase their investments and increase the amount of research that you do. That never happens if they have yet to see an organization that merge any of those things. And these are large companies that that I’ve worked with before it. You know, the fact that people believe that they’re going to become more efficient because of economies of scale is is really a huge myth. Lower prices to customers? No, because because they aren’t becoming more efficient, the prices don’t really lower. And unless they already had a mindset around investment and research, that doesn’t happen either. And most organizations be honest, we don’t even know how to do this stuff. Now, there’s some organization or if it’s in their mindset, you know. Right. So it’s already in their their culture. And and along these lines, I think that there’s this changing tide that is happening with organizations.

Tripp Babbitt: [00:08:08] We say smaller firms. Let’s say there’s that well, they’re a smaller firm where they can’t compete with a bigger firm because their costs are always going to be higher. Well, I don’t find that necessarily to be true these days. Technology has leveled the playing field quite a bit. And really, the the biggest advantage that large companies had was these huge marketing and advertising budgets that they would have. And you couldn’t really compete that like that with a company. But again, in the Internet, technology has changed this. And the advertising dollars don’t give you as big a bang for your buck as they used to. And so these now we’re starting to see these smaller firms being able to compete against larger firms because there’s not these inherent advantages between companies. And so as I’ve worked with some of these companies that have have merged, I mean it to me it’s both sad and almost humorous because there’s this these expectations that seem to be happening at some level of executive level about all these great things that are going to happen when it happens. But the first thing that happens when you get two companies going together is you’re going to have a culture clash. You’re going to have powerplays if you’re the company buying the smaller company. Typically, the smaller, you know, or none, those are even smaller. Sometimes it’s a smaller company buying a bigger company these days. But the people, the executives that are in the one company are going to use their power to be little.

Tripp Babbitt: [00:09:47] And move out executives in other companies. Now, this is universally so. And I certainly have read and talked to folks, let’s say, from places like IBM where they are now purchasing companies, just kind of leaving them alone. You know, they were doing well before. We need kind of what their technology is. We’re going to let them, you know, maintain their culture, those types of things. We aren’t really going to mess around with with what they do. But you see these huge powerplays. And then the second thing that happens typically are layoffs. Oh, we got all of these efficiencies we got to get. So we got to better show it. So they start laying people off. And, you know, you talk about an erosion of culture with the company was purchased. Why? Of course, the one that is the victor, because everything’s about competition. Right? This is about cooperation. We don’t want that competition. We bite you. So you must submit to our ways. Whereas maybe the company they purchased was doing very well before. And I think the mindset of companies now like IBM purchasing companies is is is much better. So there’s these myths around these economies of scale and fact. What you get are basically diseconomies of scale, more bureaucracy, more dysfunction, more types of things. Unless you’re going through something like what I’m laying out in this executive education program, I know it’s going to sound like a cheap plug, but in essence, taking a look at what we have, new organization.

Tripp Babbitt: [00:11:27] If you’ve got a you know and these are easy things. Right. We’ll talk about because I’ve worked with a lot of the contact centers during the course of these mergers. Oh, well. They’ve got 150 people and there’s we got 300 in ours. We’ll just move in together and we only need 225 people. Well, it sounds good, but what you find is each organization maybe working with a different set of customers, a different set of interactions going on between those companies and because they’re different, just pushing them together. Does it make sense because the customers of one company are different and their expert expectations are different? And just shoving them together is to for their efficiency. And believe me. When these mergers happen, there is huge pressure to cut costs. You know that that was the expectation. We’re gonna get these efficiencies because of this myth around economies of scale, but seen it over and over again, worked with dozens of companies, literally gone through mergers and run into these types of difficulties. But this is one of the things, as I said, gee, plug the 95 method helps overcome. So when we look at things even on a micro level, forget about a merger for a minute. But just just just thinking in terms of maybe have two divisions within an hour, we’re going to zation. They both have contact centers. Somebody hears the word context and oh, well, they just answer phones and do those types of things. We’ll just move them together, will centralize it, or we’ll do shared services of it and we’re going to push in together and the work rate, you know, and in that way we can start to cut some people, cut some costs, I’ll get a bigger bonus and all the things that come along with it.

Tripp Babbitt: [00:13:20] And this isn’t what happens, because, again, it depends on the types of customers that you’re serving, the types of interactions that they have. The expectations of these customers. And these are all the things that you walk through during this executive education program, because once you start like look at things. If you look at the customer lens, let’s say if Company A and you look through a customer lens of company before, there may be a lot of overlap or there may be none. And you really have to go beyond just fact. It’s context center or. Oh, they’re kind of the same. Cause that is where you start to lose people. And this is where the cost begins to increase and you start to get these diseconomies of scale. So that’s my message this week. I’ve added it to my executive education program. When we talk about the thinking lands and the theories at work that you have within your organization and the thinking that goes in, there is just huge myth around economies of scale that you’re going to get these efficiencies. You’re gonna become a lot more effective by virtue of doing this and, you know, all these types of things. And the thing that’s really frustrating from my standpoint is I see this and the reason they’re merging two is because executives don’t know really how to grow companies anymore.

Tripp Babbitt: [00:14:41] They know how to cut costs. They know how to lay off people because all those things are just like no brainer types of things you can do to make the company more profitable in the short term. But in the long term, it really sucks. It sucks for the employees. It sucks for the long term viability of the company. So there’s a lot of things that go on in in this thinking and what in essence, we’ll be able to build within this executive education program with the 95 method is organic growth, actual growth, because you have new products and you have new services and you have new ways of interacting with your customers. And by virtue of that, you’re going to become a much better organization, knows how to grow organically rather than kind of taking shortcuts like merging, buying other companies or merging with other companies because you don’t know how to grow otherwise. And a lot of this is rooted in the fact that we’re not tapping in to the huge resource available in workers for innovation. And, you know, the ability to use data and hope, allowing them to participate in the decision making process because they can tell you what’s going on. But because we pay them fifteen dollars an hour, their opinion is a very much, you know, worth very much if they’re even making fifteen dollars an hour.

Tripp Babbitt: [00:16:06] And so we have to do is you’ve got to start to build these customer facing roles that really create value in the eyes of the customers in such a fashion that they’ll be able to separate our company out. And this is a real problem here in the United States, which is really my primary focus.

Tripp Babbitt: [00:16:30] Yeah, I get calls from European companies and, you know, Canadians and, you know, Asian companies, those types of things.

Tripp Babbitt: [00:16:37] But the real focus for me is on the United States. We need to get these things taken care of. So that we can grow our companies organically and that we’re better than just being a profit. Pigs that go out. And how much money can I put in my pocket as an executive? So I can move on to retirement and. Oh, well, the heck with what happens with everybody else. You know, beyond that, in my company, because I got what I needed. This kind of II type of mentality is has really hurt us here in the States and. I’m listening this morning about Walwa. You know that the Chinese government invested a lot of money in five G types of things. We don’t have anybody. We’re not even competitive in that particular markets and other talking about going to probably nothing to remember both the names, but Nokia was one of them and investing in these companies so that we have a company that’s not Chinese able to compete on the five G level because they’re basically China’s kicking her butt because we’re such. So short term that doing something long term, like 5G is going to take a lot of investment, a lot of thinking. Oh, that’s just too hard. And I’ve got to put, you know, several million dollars in my pocket as an executive and walk away.

Tripp Babbitt: [00:18:05] So if you’re that mentality, you 95 method is not going to be for you.This is about long term thinking. This is about doing the right thing, giving you some new thinking, some new tools in order to grow your your organization. OK. That’s my rant for this week. I’ll talk to you next time. I should be putting the final touches on the ninety five method, the foundational pieces of building this executive education program.

Tripp Babbitt: [00:18:40] And you’ll be hearing about that problem way some time middle of next week if you are an existing executive looking for new ideas or a refresh. A new executive trying to understand a new organization or. An aspiring executive looking for a leg up on other people that you’re competing for an executive position. The ninety five method provides executive education can apply by studying your own organization. We’ll give you the necessary skills not taught at universities in synthetic thinking, neuroscience, executive data analytics, decision making innovation and a customer in organizational structure. You can get. A preview of the training right now at Mind Your Noodles dot com forward slash free or at the ninety five metho dot com forward slash free. This was a limited time offer before we start to offer the executive education for a an investment that is undetermined at this point.

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