Wednesday, April 11, 2012

Creative Destruction at Work? ... Consumer Choice, Productivity and Market Discipline

Productivity is perhaps the single biggest key to economic progress.

Getting more or the same output for the same or less input yields ongoing benefits to individual consumers and society as well.

Productivity gains are pervasive in the private sector marketplace and generally absent in the monopolistic public sector.

Thus, we don't often hear about customer satisfaction, productivity measures and cost savings in the monopolistic government sector.

Meanwhile, ongoing customer satisfaction improvement, productivity gains and stringent cost control are required in order for a company to remain viable in the competitive private sector.

It's the simple difference between competition and monopoly and the many effects associated therewith.

Let's review some private sector issues now. We'll save the public sector story for another time.

The CEO of electronics retailer Best Buy has resigned. The company's operating results have been quite weak recently, and its future success is threatened by online retailers like Amazon as consumers shift their purchases in favor of buying online and away from traditional brick and mortar retailers.

The online retailers' operating costs are lower than brick and mortar stores, price comparisons are easy to make and consumers are often deciding that the online purchasing activity is more convenient as well.

This doesn't bode well for future retail employment or retail construction either.

In fact, Best Buy's primary competitor Circuit City went bankrupt in 2009.

This is simple creative destruction at work in the private sector of retailing as consumers are able to buy the same things differently, cheaper and more conveniently than in the past. Let's examine the situation briefly.

Best Buy CEO Resigns says this in part:

"The electronics giant lately has found itself out-manuevered by Internet rivals with lower operating costs. Last month it said it would close 50 big-box stores this year, and test remodeled store formats in San Antonio and Minneapolis. It will also lay off 400 workers as part of a plan to trim $800 million in costs and restructure its ailing business. The company also plans to add hundreds of small stores that will focus on selling mobile phones.

Best Buy shares have lost more than half of their value in the past five years.

In its latest quarter, Best Buy reported a loss of $1.7 billion, or $4.89 a share, compared with a year-earlier profit of $651 million, or $1.62 a share. It included $2.6 billion in restructuring costs and other charges previously announced as it exited its big-box store business in the U.K.

In a recent interview, Mr. Dunn {outgoing CEO} said that he remains confident that Best Buy can compete against online retailing rivals. Referring to the practice of shoppers checking out merchandise in stores but buying elsewhere online, he said, "While we know 'showrooming' happens, we continue to be the No. 1 player in consumer electronics. ... Really, if a customer comes into our store to see something, I like our odds."

Mr. Dunn, who started as a store associate of Best Buy in 1985, was named CEO in June 2009. He took over as Best Buy began facing increased competition from online platforms like Inc." See also Best Buy says CEO Brian Dunn quits.

Joseph Schumpeter first described creative destruction as the capitalistic process of innovation by which the old is replaced by a newer and improved way.

This out with the old and in with the new competitive methodology involving innovation, entrepreneurship and displacement was dubbed creative destruction. The simple idea is that to create something innovative or new, we must first destroy the status quo, or something old. Hence, we've come to called that creative destruction.

This creative process applies to capitalism in the private sector marketplace and isn't generally observed in the public sector. Hence, such monopolistic areas as public schools, drivers' licensing bureaus and the post office aren't subjected to the disciplines of creative destruction. As a result, productivity isn't exactly a centerpiece of the public sector.

Accordingly, costs are high and quality is low in the monopolistic public sector, whereas the reverse is the norm in the competitive private sector. It's systemic.

The process of creative destruction doesn't only impact the unproductive. Things like cars replacing horses, e-mail replacing snail mail and buying directly on Amazon instead of going shopping at the retail store work to create progress along the productivity curve in a market based economy.

Best Buy may be experiencing such a situation as the example of "showrooming" takes hold.

Another timely example of consumers ruling the market can be found in the Florida Marlins' baseball team's decision to suspend its manager Ozzie Guillen for remarks praising Cuban communist leader Fidel Castro.

Marlins Suspend Ozzie Guillen for 5 Games puts it this way:

"Miami Marlins manager Ozzie Guillen has been suspended for five games because of his comments about Fidel Castro.

The suspension by the team takes effect immediately. It was announced Tuesday shortly before Guillen was to hold a news conference to explain his remarks, which caused a public backlash.

Guillen told Time magazine he loves Castro and respects the retired Cuban leader for staying in power so long. At least two local officials said Guillen should lose his job.

Guillen left his team in Philadelphia and flew to Miami to apologize Tuesday at the Marlins' new ballpark. The Marlins and Phillies had the day off and resume their series in Philadelphia on Wednesday."

And if that action doesn't appease the fans of the Marlins, which it won't, look for the announcement of a new manager to replace Guillen soon.

Summing Up

The free marketplace and its customers are tough and objective disciplinarians.

Brian Dunn had been employed by Best Buy since 1985, and only became CEO in 2009. Now he's gone.

Marlins manager Ozzie Guillen was both a successful baseball player and manager. His mouth, however, may prove to be his downfall. It's up to the customers, aka the fans. My bet is we should look for a new manager soon.

Creative destruction and the disciplines of the marketplace make customers the ultimate arbiters of a company's success.

In the end, people always make the critical difference, and in the competitive private sector free market consumers decide the winners and losers. Customers are in charge.

To the contrary, the decisions by leaders in the monopolistic government sector aren't designed to benefit individual consumers or citizens. Customers aren't in charge.

We'll examine the workings of the public sector more closely in future posts. While its un-Schumpeterian ways are definitely kinder and gentler to the public sector workers at the expense of the taxpaying citizens, the taxpayers aren't getting their money's worth.

That's just an inconvenient fact of life when government monopolies exist and exclude results oriented competitive private sector participants.

In other words, in the public sector creative destruction isn't welcome.

And that's both expensive and unfortunate for the vast majority of citizen taxpayers.

Thanks. Bob.

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