The Downside Of Sustainability

 

Returning to my take on the topic of sustainability from the strictly management science viewpoint, a little bit of Game Theory readily reveals that sustainability for its own sake is not always a good thing. And that little bit of Game Theory comes in the form of the Game Theorist’s favorite analytic tool, the Payoff Grid. Consider that, for any business, two factors will determine its success or failure: whether or not there is a demand for that business’ goods or services, and whether or not the selected business model is workable. For the sake of the grid, let’s posit extremes for both axes, so that there’s either demand for that particular business’ goods or services, or there is not. Similarly, the selected business model is either optimal, or rather poor. Yes, I know that in the real world such things are rarely so clearly defined – Boolean, even – but stay with me. The resulting Payoff Grid would look like this:

In Scenario A1 we see superior management in a market where there is low (or even non-existent) demand. If there were few or no customers to attract in the first place, then high-quality management can’t save such an organization. Similarly, in Scenario B1, not only are there few customers, but in the off chance that one accidentally contacts the business, their experience will likely ensure such interactions are brief. Still no absolute guarantees, but a well-managed organization in a high-demand market is almost guaranteed to succeed, at least in the near- to mid-term, meaning that it’s sustainable. It can be expected to maintain an acceptable return for its shareholders while keeping its customers and employees happy.

All of which leads us to Scenario B2, where a poorly-managed organization finds itself in a high-demand market for its goods or services. An unfortunate connotation that often accompanies the word “profit” is that it comes only at the expense of some other person or organization, but I don’t accept that associated connotation. I think a better way of looking at profit, at least from the macro-economic perspective, is that it’s signaling to the rest of the economy a need for that particular good or service, thereby deserving of more resources being diverted from lesser-needed things, and towards the profit-making ones.

Like many Americans, I live within walking distance of a “strip mall,” a row of retail businesses located in the same building. Several of these store fronts have changed hands over the years, with some of the changes being somewhat dramatic, from food service to electronics repair, video game arcade to dry cleaners, and so on. It’s a classic example of “creative destruction,” in that, once, say, the video game arcade failed to make enough money to pay its rent and other expenses, a dry-cleaning business was ready to use the same space in order to deliver a very different service. The proprietors of the dry-cleaning business probably did not care if the previous tenants fell into Payoff Grid Scenario A1 or B1, only that their business didn’t meet the same fate. Competition in a free market economy is like that. If, through ignorance or vice, management allows pathologies into the business model, the outcomes are typically as brutal as they are foreseeable.

But that very creative destruction is thwarted when the situation is best categorized as Scenario B2, where the organization remains sustainable even when the business model contains significant errors, if not pathologies. When this Scenario unfolds, it’s almost always because of some extraordinary factors, such as pertinent laws allowing for a monopolistic effect to take hold, or the particular good or service being only obtainable from a rare material or talent that the subject organization has obtained exclusively. In the short- to mid- term, such organizations are, indeed, sustainable, in that they are generating income over and above their fixed and variable costs, and appear to be positioned to do so over the long-term.

But such appearances can be deceiving. How happy are the customers? And, perhaps more telling with respect to business model pathology detection, how happy are the employees? Organizations that accept (or even welcome) employee feedback, particularly in the realm of improving business practices, are far more likely to succeed than those businesses where a heavy-handed, top-down dynamic and communication style exists. Nepotism, indeed all forms of favoritism that steer decisions on employee’s placement within the organization, can flourish if circumstances conspire to keep the poorly-managed company profitable in spite of such flaws. In this specific Scenario, “sustainability” is actually enabling such business model pathologies to survive, or even proliferate in the minds of those who begin to associate them with the very success that they experience.

So, yeah, generally speaking, sustainability is great to have when it’s achieved through an optimal business model encountering a high-demand environment. Otherwise, it can be, shall we say, problematic…