Market Power versus Lean and Agile

A recent article was shared to a Large Scale Scrum group I participate in and it got me thinking.

Towards Non-scale Management

Found interesting the following two points:

Scale covers a multitude of sins. Fat profits allow us to waste money on sloppy processes and poor customer service. Excess stock hides long or unreliable delivery times. In no case does an economy of scale solve the underlying problem. All it does is delay or muffle the signal that the problem exists.

When we rely on the benefits of scale such as lower unit costs or winner-take-all effects to make our value proposition viable, we invite risk. We build systems around scale rather than around customer value. The essential insight of Ohno’s book, in my estimation, is this danger of becoming removed from the purpose of our work. Instead of serving people and fulfilling needs of customers, scaled-up firms demand energy to serve the bureaucratic needs of the organization. Rather than working to remove barriers to flowing value to customers, we build barriers to the erosion of our scale economies.

I agree with many of the points in the article, however I think what the author really misses in this article is that the “scale” he refers to is a function of the company’s market power.

Market power is the ability of a company or small number of companies to control a large amount of the market and therefore set the price for their services. With little or no competition, customers cannot purchase the product or service from a different competitor and so pay a higher price for those products or services. Higher profits means waste of any form is easily funded. Market power gives companies the means to be wasteful. It also means there is much more incentive for those at the top of these organizations to accumulate wealth to themselves.

Market power in the hands of a few used to be considered a very bad thing for the population and the economy in general. In the past, breakups of monopolies such as AT&T, Standard Oil, and others happened when regulators and governments saw abuse of that power. Today there are many markets that are dominated by a few companies. If we look at technology, Facebook and Google are a duopoly in online advertising. Facebook (owns instagram and whatsapp) is a monopoly in social media. Microsoft is a monopoly for PC operating systems. Amazon has massive and coercive market power in online retailing. Google and Apple through their app stores have a duopoly in access to mobile apps. Boeing and Airbus are a duopoly for commercial aircraft. The majority of the market in financial services in every country I can think of is dominated by a small number of large businesses.

With so few companies dominating such large segments of the economy, why are regulators not acting? The moral compass of market regulators has shifted away from fair markets and towards protecting shareholders. The idea of maximizing “shareholder value” and optimizing for the shareholder has been promoted by private equity and the powerful financial services businesses globally. The regulators have been moved by these opinions, and the people who hold powerful positions in the regulators such as the FTC and SEC come from the financial sector. This financialization of businesses leads to dysfunctional management, and has already lead to disasters, including the Financial Crisis of 2008/9 and the Boeing 737 Max failures.

Organizations that have substantial Market power become political, since the mission changes from I have lots of money in my department so I can grow it and control more of the resources, leading to higher status. I have experienced this mostly at Financial Services clients. however these same issues have been written about fairly often at Netflix, Facebook and Google, for example

Technology, the internet and network effects lead much more quickly to a winner take all scenario. If you have to build hundreds of retail shops to reach a national market that is much more costly and time consuming, and every local market has service providers who can compete.
In my opinion, companies that “waste money on sloppy processes and poor customer service” do so because they can afford to. Those same companies will fight to keep their market power.

So what happens with Lean and Agile in an organization with substantial market power? Since the “optimization” afforded by Lean and Agile is not needed to ensure profitability, optimization, or lack of optimization becomes a political tool within the organization.

For Agilists, what conclusions can we draw?

Companies with substantial Market Power, they likely don’t need Agile or Scrum for efficiency or effectiveness. 

However if Agile and Scrum can advance certain political interests inside the organization then it may be supported. For example, if the company’s mantra is “shareholder value” then Agile and Scrum can advance a cost cutting agenda that will increase the status of the executive who cuts the costs and increases profits.

The missing context to this article is Ohno’s context, being an upstart manufacturer in a market dominated by large manufacturers with substantial market power.

Taiichi Ohno’s message was never, “My system is superior. See if you can copy it and do better.” If anything, he was warning us against making the same mistakes Toyota did in pursuing economies of scale. He arrived at the Toyota production method by asking, Who is the customer? What do they want? When do they want it? In what amount? What is the simplest and most reliable way to do this and only this, one need at a time? He didn’t like giving answers because that allowed people to not think for themselves.


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