Changed Reality : Attack of the MBAs

In my previous blog post I mentioned the concept of changed reality; the United States is no longer a land of opportunity. Looking at the post later, I realized that it is also important to know how things changed, one step at a time.

When this country began, no one wanted to create a privileged class, no one started with the intention of exporting jobs and certainly no one wanted to destroy the middle class. However, here we are, today, with the things that we never wanted and wondering how this happened.

Let us take a chronological look at the world of business to understand the road that led us here.

It was way back in 1966 when Boston consulting group (BCG) devised the ‘The experience curve’. The amount of labor that went into making a product declines predictably as the number of products manufactured increases. This led to the understanding that the company with biggest market share is going to have the least cost. In other words, it is ok to sell below cost to gain market share. This will lead to losses in the short-term but over the long-term the costs should go well below the selling price, with the added benefit of competitors going bankrupt.

BCG began working on their next innovation almost immediately and shocked the business world with the “Growth Share Matrix” in 1970. A corporation with a large portfolio could easily visualize their entire portfolio in terms of market share, and market growth and sales volume comparison between products. This single idea became the driving factor behind the decision about which business to sell-off, which business to be ‘milked’ and which business should get more resources.

The insights from all “Experience Curve” and “Growth Share Matrix” of the world are useless unless someone actually acts upon them. The costs, after all, do not decline automatically; they must be managed down. This task fell to Bain Consulting, a management consulting firm that grew about 40% a year through 1970’s and 80’s even when American economy staggered under oil shock and recession. Their secret was Best Demonstrated Practice (BDP).

Bain Consulting broke down the client processes into individual components (You can see the roots of value chain here). Next they gathered cost data from competitors and compared the costs. The next logical step was to find out what the competitor was doing right (BDP) to keep costs down and then apply the lesson learned to the client. It is no wonder that Bain consulting was known as the KGB of consulting for their love of secrecy and their willingness to spy on the competition (by legal means).

BDP was an amazing innovation that resulted in rapid cost cutting across the industry. Any process improvement implemented by one company was being copied over soon and this resulted in reaching the height of efficiency. This phenomenon can be directly compared with the rapid pace of military innovations in Europe during and after the 14th century. No sooner than innovations came out in one particular country, they were copied by every other European country.

Perhaps you can see that Bain Consulting was a landmark phenomenon. All important decisions slowly started flowing towards MBAs — and everyone else was reduced to the status of a mere machine.

Oh, and by the way, Bain Consulting was the first to (sigh!) tie compensation with an increase in stock price. It certainly looked like a good idea at that time…

And in case you are wondering, yes, Mitt Romney’s Bain Capital was an offshoot of Bain Consulting.

I think you will see where we are going with this strategy innovation in business. If not , then wait for the next post to understand what happened with these concepts and why outsourcing jobs seemed like a good idea at one point of time.