While it may seem entirely intuitive today, the concept of the “experience curve” was first offered in a Harvard Business Review article in 1964. The thesis was that as the number of units produced goes up, the cost per unit should come down.  Within the service economy, there are similar expectations. The bigger you are, the easier it should be to apply overheads and bring costs down.

Almost every industry is more competitive than it was 10 years ago.  Customers are more demanding than ever, expecting Nordstrom’s service at WalMart pricing. We have one client whose customers actually have efficiency gains written into their contracts (i.e. their customer EXPECT prices to go down, and not up). In things such as budgets and sales productivity, the entrepreneur must demand incremental improvements every year because that is what customers expect.

In order to survive the experience curve, the entrepreneur must seek out business model innovation.  In a world of reverse engineering, where your product can be mimicked around the world in a matter of days, sustainable advantage is more readily maintained through creating entirely new business platforms.

Amazon earns about a 5% markup and turns its inventory 25 times per year, compared to a discounter that might earn a 20% mark up and turn its inventory 5 times.  Unlike a typical retailer that is dependent on vendors and cash flow to fund inventory, Amazon’s model is “buyer financed”, creating a float of 41 days between the time a customer buys a book and the time the publisher is paid[i]. Thus Amazon has a distinctive cost and cash flow advantage, even over other internet retailers. In today’s environment, a two percent cost advantage can be material, and allow a competitor to undercut a market.

The quickest way to garner the experience curve is through technology.  Organizations can easily benchmark technology spending within their industry through the statements of public companies and the like.  If you are spending 2% of revenue on technology, and others are spending 4%, it is likely that some will outpace you in terms of efficiency, speed and cost.

Another experience curve gambit can be found in quality initiatives such as Total Quality Management, Lean Manufacturing and Six Sigma, all derived from a thirst for quality improvement, efficiency and cost cutting.  Becoming leaner is not a choice as much as a necessity, and the race is underway in manufacturing environments to be the leanest.  The race never ends.

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[i] Seizing The White Space Mark Johnson

Last year some overzealous Google developers decided it would be OK if the company’s new social networking site (Google Buzz) would automatically select friends for their users based on who they emailed most. The release of “Buzz” created buzz of the worst kind, a backlash on internet security and privacy, which was the pregame for Facebook’s recent missteps. Some scholars are wondering, is privacy dead? 

The constitution does not explicitly protect our privacy (The Fourth Amendment provides “the right of people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures). Yet protecting our homes, families, and information is central to our core values and American’s have an innate expectation of privacy.

The internet is a paradox; it offers us the ability to access powerful information at our fingertips. But access to information comes with a cost. It also offers the ability to track a colleague’s home address, see an aerial view of their property, see pictures of their children and know if they prefer golf, skiing or stamp collecting. It is not very difficult to ascertain ones sexual preference by looking at their Facebook page.

Consider the emerging trends in insurance coverage. The day will come shortly when an insurer will be able to track your medical history, what you had for lunch today, the number of steps you took at the gym this morning, and actuate the cost to insure you. Such modeling could reduce the cost for life and disability insurance.  Yet we see it as an invasion of our privacy. Some are wondering, what are the unintended consequences of having powerful databases which track our movements with such precision?

Clearly, the Federally mandated shift to electronic medical records is going to create shock waves for patients, who are going to need to warm up to their podiatrist seeing the rest of their medical history. But perhaps we need to see the forest through the trees. If our life could be saved by more complete medical information, wouldn’t it be worth the risk of our neighbors knowing a little bit more about us?

We reset our expectations of what is acceptable all the time. In the 50’s, Elvis shaking his hips was viewed by some as vulgar (imagine what Ward Clever would make of Lady Gaga).   It appears that we are on the cusp of resetting our expectations about what is private, and what is not. Companies have demanded since the advent of email that they own the content of the email, and that they have the right to read it at any time. Our work methods are far more public (than they used to be) in a world of common calendars and collaboration work tools.  

It appears to me that we are at a crossroads where we will really not have any choice. The converging forces of media, government, business and social networking are moving us in a direction of accepting less privacy. Organizations should be cognoscente of such concerns and make choices that protect their customers and employees. However, we may need to accept that progress comes with a price.