When demand is elastic, what happens when it snaps?

Peter Coffee Profile picture for user Peter Coffee April 3, 2024
Summary:
Which came first - the demand or the customer? Salesforce's Peter Coffee unravels important questions that business leaders should be asking.

Ball of elastic bands wrapped together © jfjacobsz2 - Canva.com

It’s easy to find citations of Peter Drucker’s statement that:

There is only one valid definition of business purpose: to create a customer.

Google knows of more than 100,000 such references; Drucker said it three times in just one of his books (Management: Tasks, Responsibilities, Practices), while the Harper Collins collection The Essential Drucker includes at least half a dozen appearances in various Drucker works. Despite my reverence for this statement, though, and even though I quote it all the time, it’s dangerously incomplete when taken out of context.

I confess to quoting Drucker out of context, often, when I want to remind company leaders that the object they produce or the services that they perform — and the skills and processes required to do so — can all too easily become, in their minds, the purpose of their business. Having formed this belief, they may then think that extending those skills, polishing those processes, and producing at larger scale and lower cost are their logical targets of thought and effort – and here there be dragons.

In defense of these executives, they have been given plenty of reasons to follow this path that — in a digital world — will almost surely lead to their own disruption. The path has been well paved by other widely-quoted statements, like the 'Stick to the Knitting' commandment that is the title of an entire chapter of In Search of Excellence. That chapter further elaborates that “the most successful [organizations] of all are those diversified around a single skill – the coating and bonding technology at 3M, for example.” Considering its sales of three million copies in its first four years of publication, is it possible to challenge this book’s advice?

Chaos and Excellence

Not only is it possible to contradict Excellence: my colleagues know that any time I mention this book, I’m usually teeing up to quote a six-years-later book from its co-author Tom Peters, whose Thriving on Chaos came admirably close to recanting Excellence despite the earlier book’s huge popularity. Chaos has only a tenth as many Google hits as Excellence, but I consider it the more important work – because, in the years after Excellence was published, Peters acknowledged that “It soon became apparent that the ‘excellence phenomenon’…was not leading to rapid enough transformation by most firms”. In “a world turned upside down,” Peters went on to say, “there are no excellent companies.”

Rather than sticking to familiar knitting, he asserted in Chaos that “the new basics” include “enhanced responsiveness through greatly increased flexibility and continuous, short-cycle innovation and improvement aimed at creating new markets.” This is, he clarified, not the chaos of hopeless confusion, but the astrophysical chaos of a new universe being formed from enormous new energies and forces. Almost forty years later, does this sound as if it were being said right now?

Let’s circle back to the dragons awaiting mere customer-creators. Sometimes, out-of-context customer creation can seem to be working for many years — and even at enormous scale — when the customers come along for the ride. Entire industries can arise, and grow, when the business and its customers share what John Gall’s Systemantics calls a “Systems Delusion”: Gall offers an example by asking,

Doesn't the auto industry supply us with millions of new cars each year, even tailoring them to our changing tastes in style and performance? Answer: the reason we think the auto industry is meeting our needs is that we have almost completely forgotten what we originally wanted, namely, a means of going from one place to another that would be cheap, easy, convenient, safe, and fast.”

The shared delusion, he concludes, is that:

If Detroit makes it, it must be an automobile.

Questions

What happens when this kind of folie a deux breaks down? What happens when a ride-share app means that access, at a moment’s notice, to point-to-point transportation no longer depends on owning a physical asset with high initial and recurring costs, requiring skills to use and insurance to guard against its related risks?

The automobile is not the only example: what happens when a personal library of musical performances no longer needs shelf space to store it, or dedicated appliances to enjoy it? If you thought your future was assured because you made an excellent product at a competitive price, one hopes that it was not one of the dozens of products that have almost vanished entirely – because their functions are encompassed by smartphones and cloud services. As it turned out, no one wanted those products at all: they only wanted their utility, which customers were glad to obtain by more convenient means.

Today’s question is surely, 'What happens when expert advice on any subject is available anywhere, at any time?' That’s still a work in progress, but we are clearly adding depth and breadth to what the late Jerry Pournelle described in 1979 as a world in which “anyone in Western Civilization will be able to get the answer to any question that has an answer.” He predicted that this would happen by the year 2000, and in that year, he declared that goal achieved. But the distance traveled since then, in terms of answers being accessible to anyone even capable of asking a question — without specialized skills or privileged access to data — might even have exceeded Pournelle’s expectations at the time of his death in 2017.

Tomorrow’s question is, to borrow from Norbert Wiener’s 1948 introduction to the first edition of Cybernetics, 'What will the average human being have to sell that will be worth anyone’s money to buy? What will be the nature of added value?' When explaining the idea of elastic demand, I observe that I can sell an unlimited number of £1 notes at £0.99: a revenue target will not be difficult to achieve. The real question is, what more will be needed to sell even a single £1 note for £1.01? When demand is elastic, what happens when it snaps?

The answers require us to go back to our beginning, and provide the missing context for Drucker’s instruction to go forth and create customers:

It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods… What the customer considers value, is decisive.

Finally, and very much to the point in this time when the whole relationship of businesses to customers is very much in flux:

To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.

Attention to underlying wants and needs has never been more important. Applying new tools to yesterday’s notions of 'product' will not stand up to the tensions, on that trust, that we must expect tomorrow.

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