The Paradox of ‘Greed is Good’
Wall Street says “Greed is good”, but the truth is businesses should never be too greedy (yet).
I understand, every business wants to achieve a monopoly status, they strive to be the next Microsoft before the meteoric rise of Apple. Yet the irony remains that most developed countries inhibits the proliferation of monopolistic forms with the enactment of anti-trust laws. (Google is fighting this hard in Europe)
Hence, this is what happens:
Assuming the case of market dynamics in force, theoretically any business in a free market condition would have difficulty in sustaining a monopoly status over the long-term. Competitors are like wolves, constantly sniffing out businesses opportunities and swarming the market until what used to be unique products gradually gets commoditized.
Hence, in any market, the big boys almost always seek to create huge entry barriers for their competitors, inclusive of legal obstacles and unfavorable launch conditions. (Season 2 of Silicon Valley depicts this well)
Adding on to this, any new player would probably suffer from a lack of market trust (especially in modern platform-based businesses), liquidity issues and operational challenges right from the onset that it must deal with. Cumulatively, it almost become a “chicken-and-egg” problem for the new player trying to take down the big guys.
Yet big companies go boom and bust, just like the rise and fall of dynasties.
The main factor behind this? The big boys themselves.
Talk about big companies and the common stereotypes that the mass public would instantly relate to are possibly “big, arrogant executives”, “tall bureaucratic structure”, “red tape’, “UN-innovative” and worse still… “not listening enough to their customers”.
While companies are seen as separate legal entities, one should never commit to the perception that the company is separable from its people. Remember, it is the army of employees from all levels fighting hard together everyday and ensuring that the company remains in the pink of health.
However, what happens in reality is that a number of companies are still susceptible to this “greed syndrome”.
(Greed here is defined as “offering low value for high margins”)
Not quite get this part? Let me use a real-world situation to describe briefly.
On a recent trip to Vietnam, I observed there were a lot of drivers around (cyclos, motorbikers, cabbies) and there was one big problem. In emerging markets like Vietnam, where the standard of living is still pretty low, it is not uncommon to hear of cases whereby people try to scam your money. (Yes, it seems to be an official crime that local drivers can get away with easily.)
I tried to avoid getting scammed, but really, sometimes it really gets very frustrating not knowing who are the real scammers. And once, I got scammed by the taxi driver whom apparently must have modified his meter to let it run much, much faster. How else would a 15 minutes cab ride rake up a cost of 20++ dollars?
In simple analogy, these people would rather get a quick gain of 300% profits rather than a mere 20% profit. (Just a ballpark figure, but you get the idea)
For scammers, they do it the illegal way since regulation is lax in the country.
For ‘greedy companies’, obviously it’s tougher if they utilize the same method, they have a reputation to secure. Hence, the alternative (and legal) method is to exercise their market power and asymmetric information to their advantage. Consumers either have no clue on their margin levels, or have no recourse because they got “low-valued”.
And greedy companies big or small that fail to implement innovation as part of their strategic and operational processes delude themselves in a fallacy “customers have been using our products for years, and they do not seem to be complaining. Therefore, our product MUST be good enough, why then should we need to spend funds on innovation?”
“Besides, our market position is strong enough to crush our competitors brain-dead. They won’t stand any chance of success against us”.
On lack of disruptive innovation:
A strong market position in the long run could potentially lead to complacency and insufficient effort to promote innovation in the industry. Coupled with a tall bureaucratic structure and processes would start to lag.
Greedy companies may also treat their employees as merely tools for making money, without emphasis on creating a healthy positive culture because they seem relatively un-important in the eyes of profits.
In fact, most CEO of listed companies are contracted on a performance basis, and often heavily scrutinized and answerable to their beloved shareholders. The result often morphs into a harsh drive for short-term profits.
Even if a strategy could be viable to boost long-term success, if there is no leap in contribution over the short-term horizon, there is a possibility that it could be abandoned for a shorter-term strategy instead — one that may seem to improve the financial performance, albeit at a future cost.
For lack-luster companies, this phenomenon is almost clearly seen. Talk about the year 2008 and the bunch of bankers with huge bonuses eventually leading up to the financial crisis.
Some reasons why certain ‘greedy companies’ do still control massive market share is due to:
- Old habits do not die easily. Their customers have become too used to the same old products (e.g. your everyday shampoo) that they can in fact become skeptical of trying out new products.
- Regulations that protect them — the financial industry, as well as the telecommunications industry, happens to be among the group. Wanna be the ‘New kid on the block’? Ok, get your license first, and prepare to throw in huge capital before you even get your business started. That is why financial industry have been relatively slower in warming up to newer innovations as compared to other business sectors.
- Customers do not know yet of new products in the market. The cost of marketing for new entrants via the traditional methods is too high given the level of noise in the market. Only few new entrant startups execute this well, but the rise of technology could vastly accelerate the process.
Greed may be good, for it provide the big corporations a high return on ROI in the short to mid-term. Being greedy could have been good for businesses in the last decade, yet too much greed in this modern era will cause the downfall of companies. Things will change, and it is changing.
It is now the era of tech startups. STARTUPS ARE RISING. Goliath ought to be afraid of David.
Here’s a scenario you would probably be familiar with:
Before this ‘tech era’, big companies are the dominant parties on the recruitment scene. Graduates and job-seekers flock to them like bees to nectar. They get to choose who they want, settle on the salary range that’s most cost-saving or simply outsource it. Talents are merely one of their money tools, and it’s alright even if they go unnoticed.
Well, these big guys are still dominant now, but I am sure they are at least less arrogant than before. The talent war is heating up everywhere, especially in Silicon Valley. Any talented individuals would now have a better bargaining chip on the table than the past as employers realize the need for them.
The tides have turned. No longer fighting for the cheapest, but bidding up for the best compensation and perks to rope-in and wipe talents off the market.
In consumer terms, it is also a buyer’s market. Technology advancement leads to lower cost of starting businesses, and easier search for better products online.
Satisfy your users or die.
In Paul Graham’s words:
~ “Google understands a few other things most Web companies still don’t. The most important is that you should put users before advertisers, even though the advertisers are paying and users aren’t.” ~
Too many businesses in the intermediary business are too focused on paying customers (aka the sellers) that they forgot who where the ultimate source of the money came from.
In an ugly comparison, it’s like how most multi-level marketing scheme works. People try to rope in new distributors who pay to join, but it is just not a sustainable model. The model is legitimate if the sales representatives focus on selling to customers where the real revenue is, and not wrongly focus on trying to get new ‘down-lines’ who pay to join, earning them a commission and thinking somebody will do the selling for them.
With the rise of the e-commerce race, Uber/Airbnb and the sharing economy, the transfer of power and control in the market becomes even more obvious.
Businesses must create enough value to their customers at an agreeable pricing. The world is one big market and each individual customer experience matter, no longer a pushover by big companies.
One notable example would be the telecommunications industry in Singapore. It is currently an oligopoly served by the Big 3 (Singtel, Starhub & M1). Internet plan pricing were once high.
But prices have dramatically decreased since a few years ago.
In 2011, 100Mbps fibre broadband cost around S$65.
In 2016, 100Mbps fibre broadband only cost S$29.
How is such a drastic drop possible within just 4 years?
Firstly, the government understands the need for a strong infrastructure, with the IDA overseeing the policy of Next Generation Nationwide Broadband Network (NGNBN) thus creating a more level-playing field. This resulted in new internet service providers popping up to provide more diverse and competitive offerings, including the new-kid-on-the-block MyRepublic that threatens to disrupt up the industry with better pricing structures.
I am going to provide you with a bonus example:
Heard of Uber and Grab (Taxi)? Both are platform businesses that aims to enhance and disrupt the transport industry by providing reliable modes of transport.
While we often hear in the media about protests against these tech unicorns, and how taxi drivers have been side-lined against, I believe it is vital that we take a step back and remind ourselves that all businesses exist to serve a problem. And these tech unicorns grew because they have managed to serve these issues well.
Purposely trying to hide because it’s 5 minutes more till midnight and coming out when the clock strikes 12am? (because there is a 50% midnight surcharge so taxi drivers earn much more even though they could be plying the same route)
Is this not similar to the analogy above where one party tries to “get a quick gain of 300% profits rather than a mere 20% profit”?
There’s also another downside of greed — people hate being seen as a victim of ‘greedy parties’, for it simply makes them appear dumb.
From the baby boomers to gen-X and gen-Y, there has been a paradigm shift in mindset. People are now looking for the acceptance of others, be it offline or online, and they want to feel good, be cool and look smart. Businesses that fail to understand this aspect will inevitably die.
Ultimately, there is no right or wrong in being greedy, but people will always choose the path of least resistance and one that best suits them.
Cash is king, and is the underlying source of health for any business. I do not advocate changing this golden rule, just make sure that you are creating huge value to make your people (be they internal employees or customers) sufficiently happy so that they will be loyal for as long as you wish.
Greed was once good, now no longer. It should be balanced with provision of good value and exceeding expectations is a heavy responsibility that comes with a certain level of trust.
Once the trust is broken, it will be hard to mend it.