Tuesday, July 7, 2009

Scalability As a Competitive Advantage

It is hard to feel upbeat about the automobile industry on a day when one of the big parts manufacturers is in bankruptcy court explaining to a judge why it can’t pay its bills. Lear Corp. missed an interest payment last week and, looking forward, things look worse.

The auto industry’s difficulties are occurring just because the demand for light trucks has fallen by about 40 percent. If you stop and think about it, though, you ask why this is such a problem. Why can’t a company like Lear just cut back its activities where it needs to, and keep going on a smaller scale?

This question is the question of scalability. The question we ask, in general terms, is whether something can get bigger and smaller and continue to function. We take scalability for granted in many areas of life and work. You want to bake an 8-inch cherry pie instead of a 9-inch pie? Just reduce all the ingredients by one fifth. Cutting your ten-minute speech short after just five or six minutes? The microphone works exactly the same way for the shorter speech. A few more people want to go to the concert? You might need an additional car, but you’ll still get to the show.

Manufacturing is fundamentally scalable. Buy fewer materials, put in less work, and you can produce less output at a lower total cost. The difficulties the auto industry is having are primarily a failure of imagination. The “onward and upward” thinking that serves business well enough most of the time becomes a delusion in times of reduced demand. Yet for many business leaders, the tougher the challenge, the more inflexible their thinking becomes. It is mostly from this inflexible thinking that the manufacturing process loses its scalability.

This is a trap that frequently trips up business corporations, but that very few of us as individuals would ever fall into. The familiar cliché of “lean times” implies that when money is “tight,” we know how to adjust by buying food in smaller amounts. If this goes on for a few months, we might start to lose weight, hence, “lean.” As individuals, we can adjust to much bigger changes than business budgets ever foresee.

This flexibility is a competitive advantage that individuals have when compared to business corporations. No matter how flexible a corporation tries to be, it can never approach the flexibility of an individual worker. With their limited flexibility, business corporations struggle to compete in the small-scale work that individuals can do.

Corporations still have to compete with each other, and the bumpier the economy is, the more of an advantage scalability becomes. Several companies in the auto industry have gone bankrupt, but most have not. The ones that keep going are, for the most part, the ones that planned all along to adapt as circumstances changed.