Part 6—Price Factor Equalization
In Part 1 of this 7-part series of posts we looked at VUCA, where the term originated, what it means, and how it relates to Agile leadership. The speed and interdependence of events in today’s world will ultimately overwhelm the time-honored processes and culture we’ve so far built. Once comforting constants are transforming into variables that defy predictability and challenge traditional models of leadership and management.
In this part of the series we’ll look at what economists call “Price Factor Equalization. An economic construct, Price Factor Equalization has become a dominant, global force affecting businesses and individuals.
If you do not sufficiently differentiate yourself from your competitors, and
If your competitors have the same access to materials, equipment and technology as you do (with global, internet-connected, sourcing markets, they do), and
If your competitors have the same access to capital as you do (with global, internet-connected, capital markets; crowd funding; etc.; they do), and
If your competitors have the same access to labor and talent as you do (with global, internet-connected, labor markets; outsourcing of anything and everything; etc.; they do), then
You will work for your competitor’s wages.
Examples in Real Life
Let me give you two examples of what Price Factor Equalization looks like in real life.
The first is a business example. After WWII, the U.S. dominated every market it was in; the rest of the world’s manufacturing capability was being rebuilt, meanwhile, if the U.S. could build it, the U.S. could sell it. This bred business-threatening complacency.
With titans like Admiral, GE, Motorola, RCA, Westinghouse, Zenith, and others, consumer electronics was one of the many markets that the U.S. essentially owned, and the industry earned a comfortable average of ~15%. In the 1960’s, Japan finding its legs and decided that they wanted to enter this market. They were willing to learn their way in to the market, and they were willing to work for 8%.
Japanese manufacturers (e.g., JVC, Panasonic, Sony, etc.) entered on the low end with portable transistor radios, and because they were willing to work for 8% compared to U.S. manufacturers 15%, they started gaining traction. U.S. manufacturers looked at this, and decided that they were not willing to work for less than 15%, and given that portable transistor radios were the low end of the market (color TV sets was where the real money was at), they were willing to yield the segment to Japanese manufacturers.
But the Japanese didn’t stop there; next they set their sights on table top radio sets. Again, they were willing to work for 8%, the U.S. manufacturers were not and yielded the segment. And up the market ladder the Japanese went. The Japanese moved to black and white TV sets; U.S. manufacturers yielded. Finally, the Japanese put crosshairs on the color TV market segment. U.S. manufacturers tried to fight back, but it was too late. By this time the Japanese manufacturers had established their reputation in the market, and they were willing to work for less than the U.S. manufacturers. The U.S. manufacturers had systematically yielded the consumer electronics market to the Japanese. Since then, the Japanese consumer electronics manufacturers have had their own difficulties fending off South Korean manufacturers, but in the consumer electronics market, the U.S. is inconsequential. There are still some U.S. consumer electronics manufacturers around today, but they are remnants nibbling at the edges and certainly are not dominant market forces.
The above example is one of Price Factor Equalization at work at the business level. Our second example is one at the individual level, and it is a quick one. When my daughters were in high school and looking at post-secondary education options, I explained price factor equalization to them this way. In today’s world where a company can have things done anywhere in the world they wanted, people seeking employment have but two things that they can offer a prospective employer: higher skills or lower wages. I advised my daughters to pick one.
Agile Leadership & Price Factor Equalization
Agile leaders understand that Price Factor Equalization places a premium on competitive differentiation:
- It may be in what your product/service does.
- It may be the way in which your product/service does what it does.
- It may very well be that your gadget isn’t as important as the services with which you wrap it.
But if you can’t otherwise differentiate your product or service, it automatically becomes a commodity in the eyes of the market, and the market default for product differentiation is cost, and you are now in a race to the bottom.
Agile leaders understand that this need for differentiation applies whether you are serving an external customer or an internal customer. Agile leaders understand, that just because they are serving an internal customer, they are not entitled to that customer’s business because in today’s world, whatever it is you do, you have competitors—you can be replaced, your function can be outsourced, or your function may be reengineered out of existence.
Agile leaders also understand that Price Factor Equalization places a premium on competitive differentiation in people looking for a job or a gig, too:
- It may be in what you do.
- It may be the way in which you do what you do.
- It may very well be that what you do or how you do it isn’t as important as all of the other stuff you bring to the table.
But if you can’t otherwise differentiate yourself, you automatically become a commodity in the eyes of the market, and the market default for skills differentiation is cost, and you are now in a race to the bottom. Like I told my daughters; you have two things that you can offer a prospective employer (or client): higher skills or lower wages.