The Economics of Missing Market Signals (by Point Blank Economics)
Companies are failing at an alarming rate and their life spans are shrinking fast. Just as markets fail from the inefficient allocation of resources, so too are companies failing from the same problem.
A widening gap between research and productivity illustrates the problem:
multinational corporations account for 75% of private sector research but only 40% of productivity growth.
Why such a huge gap? Companies are making bad decisions around the deployment of resources which is crippling their productivity.
In these companies, the very information needed to make optimal resource allocations is absent. There is a lack of visibility into the changing business and market dynamics. Myths are never dispelled and folklore is used instead of data. Often, ignorant of the changing landscape, executives believe emerging customer requirements fall outside of the ‘core’ business. Signals of impending disturbances, changes in customer preferences and emerging substitutes are missed and ignored.
When a company holds on to distorted beliefs about the market, irrational and inefficient resource decisions flourish. When markets are missed, assets underperform, productivity suffers and competitiveness declines.
But signals are not served on a platter. Keeping the company out of Plato’s cave* takes effort and resources. Market Signals are the unintentional exchange of information. It requires thoughtful investigation and observance along with strategic analysis.
Although companies aspire to dominate markets and to run a microcosm of an economy, many have lost sight of the fundamental economics they must serve: achieve optimal resource allocations for increasing productivity. In corporations, bad decisions around resource allocations are being made not because the executives are irrational, but because they are missing key signals from their market.
When market signals are missed, assets underperform, productivity suffers and competitiveness declines. This is THE number one killer of corporations today.
TAKE ACTION: Harvest Signals Constantly
Bring a new conversation to this year’s plan: Watch for market signals
o Benchmark the company’s track record of successfully expanding into related services and markets
o Re-orient your environmental scans to collect unintended market signals
o What on-line mechanisms can collect and report market behaviors?
* End note___________________________________________________________________________
The Allegory of the Cave, is the philosophical work of Plato (380 BC) who illustrates how people rely on perception instead of reasoning. In the cave, humans only see shadows and do not understand the shadows are not the true form of reality, which is outside of the cave. Interpretations vary, but most scholars agree the cave represents human ignorance in the face of not being able or willing to seek truth and wisdom, outside of the cave.
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