Arms race to zero margins

In a recent survey by PwC, CEOs said the biggest internal projects they implemented last year or plan to implement this year are cost-reduction initiatives. CEOs are tightening their belts, doing what they know how to do in order to survive: decrease costs and increase efficiencies.

This is a game that cannot be won. The faster costs are decreased, the faster an organization and market will become extinct unless it looks inward and develops a sustainability strategy to grow and thrive. As you decrease costs, so does your competitor, and ultimately, the gains become increasingly smaller and smaller, driving margins down until there’s no more juice to squeeze out of your organization.

Technology is great at cost reduction and it’s often necessary. All your competitors are using it, so you have to as well. But, it won’t provide long-term competitive advantage on its own, unless you’re Amazon or Apple or Google. Only the biggest firms have the means to use big data for long-term competitive advantage and realize true productivity gains. For the rest of the world, technology has only sped up the competitive cycle. It’s an arms race to zero margins and it’s a zero-sum game in the end.

So, on the one hand, CEOs know they need to transform their organizations (we hear them speak about this need daily), but on the other hand, they fall back to a position of trying to increase their efficiencies and failing to develop medium- and long-term growth strategies that are actually sustainable and provide real competitive advantage.

Why is this?

Fear, perhaps.

Uncertainty.

Not knowing what to do.

Not knowing how to get there.

Not understanding how customer interests are changing.

Aversion to career risk.

Blinded by the headlights of today’s rapidly changing markets

The list goes on.

Evolutionary theorists might tell us that members of a species will minimize the use of energy in the face of uncertainty. Scanning the periphery for signs of change and developing a strategy for change takes a lot more energy than maintaining the status quo. It’s easier and safer to hide in the middle of the herd than be on the lookout for change (threats/opportunities) at the edge of the herd.

As these executives refine operational efficiencies and cut costs, the ground is eroding from right under their feet. If they don’t act, they will most certainly be caught flatfooted when their industries get upended by volatile and seismic forces.