Wednesday, June 30, 2004

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The personal prejudices of Daniel Davies

Over at Crooked Timber, dsquared has some issues with my recommendation of William W. Lewis' The Power of Productivity . You should read his post in full, but -- since this deals in part with management consultants -- here's the bullet-point executive summary version:

  • The Power of Productivity was written by a management consultant, and management consultants are incompetent gits;

  • Lewis conducts the typical management consultant mistake of extrapolating from individual cases, particularly Wal-Mart;

  • The role of Wal-Mart in the general increases in retail productivity are grounds for suspicion, since there are lots of reasons why their productivity might be overestimated -- for example:

    [I]f the boutiques on King’s Road were to get rid of the dolly assistants, free coffee and assorted perks and bijouterie, and move to a model where they piled the Prada high in fluorescent-lit barns, then they would presumably be able to shift more units at a lower price, at the expense of taking all the joy out of shopping for the Sex-in-the-City crowd.

    Later, Davies commented on his own post, "I dispute that it is any quicker to get your shopping done in a big-box retailer than on the high street."

  • I share Davies' leeriness with regard to management consultants. Some years ago I had to review former McKinsey consultant Kenichi Ohmae's The End of the Nation State and was appalled by the sloppiness of the argument. More horrifying were the footnotes -- Ohmae cited something written by himself 93% of the time.

    Management consultants also tend to use the method of comparison to analyze the secrets of business success (i.e., looking at world-class firms to identify the commonalities as the recipe for success) when in fact the method of difference would prove more reliable (i.e., looking at successes and failures and identifying what the successes had in common that was not present among the failures).

    Now, Davies appears to have extrapolated the tropes common to management consultants onto the Lewis book without, like, having read any of the book. I shared Davies' bias, and was wary about seeing typical management consultant mistakes in the analysis, but all I can say is that The Power of Productivity was a pleasant exception -- hence the recommendation.

    It's also worth pointing out -- and my apologies if I didn't do so in the previous post -- that the analysis in the book is not at the firm level so much as the sectoral level. Furthermore, the sectors he looks at are reasonably important to the macroeconomy. For example, in retail, the key thesis for Lewis is not just Wal-Mart increasing retail productivity, but the market response to Wal-Mart increasing productivity. The following comes from p. 92-96:

    Starting in 1995, accelerated its productivity growth rate from 3.3 percent per year to 5.1 percent per year. The competition, however, increased its productivity at an even higher rate of 6.4 percent per year. When Wal-Mart captured 27 percent of the market in 1995, it could no longer be ignored. The race for survival was on. By 199, Wal-Mart had increased its market share onlu slightly, to 30 percent. One-third of the productivity growth jump in general merchandising retailing came from Wal-Mart's accelerated rate of improvement. Two-thirds came from the competitive reaction of Sears, Costco, Target, Meijer, Kohl's, MacFrugals, etc....

    The Wal-Mart effect goes beyond retailing into wholesaling.... Thse modern retailers saw an opportunity to bypass the efficient, monopolistic wholesaling sector and acquire goods much more cheaply. Wal-Mart set up its own distribution centers, which bought directly from manufacturers. Modern food supermarkets did the same thing. A few wholesalers noticed and realized that they were going to have to compete.

    I'm not going to go into depth on Daniel's last assertion, as his commenters are taking him to task on it. I am struck, however, that he seems to assume it's a lifestyle choice question -- that the introduction of Wal-Marts threatens the joys of shopping for sophisticates. This neglects the millions of Americans who cannot afford the high street stores but now have the opportunity to purchase cheaper and more varied goods courtesy of the big box stores and their enhanced productivity. For Davies, the deadweight loss of eliminating these transactions appears worth paying to preserve high streets. I don't think it's quite such an either/or choice, but I'm intrigued by the revealed preference.

    UPDATE: A few additional thoughts:

    1) Even in this post, I'm not sure I've adequately spelled out the fact that in contrast to much of the management consultant literature, Lewis does have a compelling theory to guide his argument -- simply put, the value of competition in goods markets has been undervalued relative to labor and/or capital markets. This is a big reason why markets that directly interact with consumers -- retail and housing -- explain both the growing produictivity gap and GDP per capita gap between the U.S. and most other OECD countries.

    2) Both Davies and Brad DeLong state that the productivity numbers might be misleading because it masks costs that are passed onto the consumer via the reduction of "ancillary (but valuable) services."

    This is a fair point -- and one that Lewis addresses in comparing retail productivity in the U.S. and Europe. The thing is, contrary to assumption, it's European retailers that have sacrificed many of these ancillary services, due in no small part to minimum wage laws. From p. 44-5 of The Power of Productivity:

    France and Germany have minimum wage levels of about twice the U.S. level. The sophisticated French and German retailers have found that they make more profits by not hiring the bag packers and paying them the high minimum wage....

    In the mid-1990's, when we measured retailing productivity, we found that productivity in France and Germany was at least as high and maybe higher than in the United States. There is a problem, however, with the measurement of retailing productivity when the service levels are not the same. The OECD purchasing power parity exchange rates cannot capture the differences in services when stores with the same service level do not exist in both economies. The services provided by low-skilled workers in the United States are therefore likely to be missed by the OECD. We corrected for this factor by calculating the productivity of the French and German retailing industries if they employed similar numbers of low-skilled workers to provide the "bag-packing" services found in the United States. The result was a reduction in productivity in French and German retailing by about 15 percent, to a level somewhat below the United States.

    3) Davies wants to attribute productivity gains ascribed to the market response to Wal-Mart to ""the general diffusion of technological improvement". It's far from clear to me that's this is an either/or proposition. As dsquared is undoubtedly aware, it's not just technology per se that increases productivity, it's how firms and markets reorganize themselves to fully exploit that technology that increases productivity. The diffusion of Wal-Mart's organizational innovations to the rest of the retail sector -- spurred by market competition -- is key here.

    4) Finally, Daniel's suggestion that big box stores locate where they do because of supply and not demand considerations omits any mention of zoning/land use restrictions that prevent stores like Wal-Mart from locating themselves closer to urban customers. Click here, here, here, and here for my posts about Wal-Mart's efforts to open up stores within Chicago's city limits. And, as always, be sure to check out Always Low Prices, a blog devoted to the best and worst of Wal-Mart.

    All this said, I do hope that Daniel takes the opportunity to peruse The Power of Productivity, and I look forward to further debate on this stimulating (to me) topic.

    posted by Dan on 06.30.04 at 06:54 PM


    The Bureau of Labor Statistics has been fighting within itself for a decade and a half about how much of cost reductions associated with big-box retailing are actual productivity increases and how much are reductions in ancillary (but valuable) services--a "quality change" is how they put it. it's not a closed question.

    Nor do we yet have our hands on how much of the cost reductions are the result of worker speed-up. I'm much more optimistic about this than DD is, but his position is not stupid...

    posted by: Brad DeLong on 06.30.04 at 06:54 PM [permalink]

    As a noneconomist, I took one of DD's central points to be that one of the reasons Wal-Mart (like) institutions paint such a rosy picture of productivity is that they have avoided one of the central costs of retailing: the expense of moving goods to where people live. They've avoided this cost (and increased their 'productivity') by fobbing it off on the consumer: I have to pay to drive out to Wal-Mart (i.e. where the goods are). If this is true it is one reason why Wal-Mart need not be a cost saver (or much more productive) than stores closer to home.

    posted by: Kramer on 06.30.04 at 06:54 PM [permalink]

    Who is dsquared? Daniel Davies is someone with a contempt for truth. These are his own words (posted on Jane Galt’s blog concerning the infamous Jason Blair scandal:

    “I vaguely point out that the crimes which set off this whole episode of breast-beating would most likely not even have warranted an internal reprimand here in the Greatest Newspaper Market On Earth [tm]. You read about far worse lifting and quote-polishing in Private Eye every couple of weeks (Robert Fisk detractors, buy the current issue; it's got an absolute pearl in it).

    I try not to conclude from Sulzberger's disgusting grovelling that the American public has got exactly the self-righteous, prissy, cowardly press it wants, but it gets harder every day. Why doesn't somebody prevail on Rupert Murdoch to give you folks a proper newspaper?

    Posted by: dsquared on May 15, 2003 08:10 AM”

    Do I really need to add anything? There is little reason to take Mr Davies seriously.

    posted by: David Thomson on 06.30.04 at 06:54 PM [permalink]

    “I have to pay to drive out to Wal-Mart (i.e. where the goods are). If this is true it is one reason why Wal-Mart need not be a cost saver (or much more productive) than stores closer to home.”

    Wal-Mart is not a perfect company. I’m convinced that it is guilty of sex discrimination and cheating employees out of their overtime pay. Mistakes have been made and Wal-Mart needs to be taken to task. Nonetheless, the recent radical liberal attacks on this mammoth corporation often border on the ridiculous. My family lives between two Wal-Mart stores. The grocery market is only three minutes away and the super store about seven minutes from my front door. I see little, if any, difference between driving to Wal-Mart or any other retail outlet. Is that the best you can do? Are you truly getting that desperate?

    posted by: David Thomson on 06.30.04 at 06:54 PM [permalink]

    Hey David:

    Home for me is also a five minute drive from Wal-Mart also. I think the point, though, is that part of the reason why Wal-Marts are situated at the particular locations chosen is because of relatively low property prices (at least when the store goes in). If subsequently development continues around the store (as it has done in my town over the last decade) this is good for the store in the short term (obviously more customers). In the long term, however, it seems probably bad. If too many people live around a Wal-Mart the land the store sits on becomes more valuable then the store and eventually the store gets sold and moved, once again, further from where people live.

    I expect in my town (which has seen substantial growth over the last twnety years or so) Wal-Mart will eventually move further away from where folks live. If populations are stable enough in your town, possibly it won't (which would certainly be convenient).

    posted by: Kramer on 06.30.04 at 06:54 PM [permalink]

    Funny how one's personal circumstances can restrict one's point of view. For those who don't live amongst urban sprawl (Chicago and Houston, for two random examples), WalMart hasn't impeded the high street shopping experience. In fact, there wasn't any high street experience to begin with. And WalMart can indeed have the impact described by Kramer.

    My parents, for example, now have to drive 20 minutes or more to do most of their non-grocery shopping. The local WalMart/Lowe's combo has essentially put the close-in competing retailers (i.e. less than 5 minute drive from home) out of business. Aside from a few drugstores and a Dollar general store (the antithesis of high street shopping), my parents simply don't have an alternative to making the drive. I'd have to guess that the aggregate transportation costs for all the residents in the mini-region represent a significant sum. (Of course my one-off example doesn't exactly resonate with statistical significance, but it does seem to offset whatever lies 7 minutes from David Thomson's front door.)

    Speaking of which, I find it richly ironic that David Thomson can pontificate on the Personal Prejudices of Daniel Davies. In fact, David Thomson subjects the readers of Daniel Drezner to the Personal Prejudices of David Thomson in the comments section of nearly every post.

    Give it a rest, David. You're not nearly as smart as you think you are and the rest of us aren't nearly as clueless as you treat us.

    Apologies to the rest for sinking into the snark.


    posted by: Rofe on 06.30.04 at 06:54 PM [permalink]

    This neglects the millions of Americans who cannot afford the high street stores

    Strange ... as I mentioned in comments, I did some of my growing up in Oklahoma City during the oil boom of the early 1980s, when WalMart (if it existed at all) was a local Arkansas chain and big box retailing was as yet a glimmer in a consultants' eye.

    I seem to remember that there were millions of Americans back then ... what were they all eating?

    posted by: dsquared on 06.30.04 at 06:54 PM [permalink]

    Wal-Mart re-energised it's competitors establishing incredibly low merchandise landed cost by developing a world class distribution network. Competitors, here-to-fore bloated by sufficient profits began losing market share and folding. K-Mart is the antithesis of Wal-Mart, having both poor or outdated distribution and lazy POS practices. Specialty stores like hardware were initially subjected to doom and gloom until they realized that Wal-Mart did, in fact, draw customers in from further out, creating foot traffic for them if they could root out the proper niches, mostly those service related functions necessary for the growing population of do-it-yourselfers. This isn't magic, it's basic strategy, always drifted away from by a mature industry asleep at the wheel. Now some of the most successful "ma and pa" specialty stores are just down the street from a big box intersection. It's called free enterprise for all you deep thinkers.

    posted by: RD on 06.30.04 at 06:54 PM [permalink]

    I seem to remember that there were millions of Americans back then ... what were they all eating?

    I wish I had a nickel for every time someone implied that the shopping environment of Oklahoma in the early 1980s was a retailing utopia which should serve as a model for all of mankind's aspirations in the future...

    posted by: Jonas Cord on 06.30.04 at 06:54 PM [permalink]

    I find Kramer's comments not applicable to my area;

    Closer to home?
    I have 2 of them within 4 miles of my house, 5 of them within a 15 mile radius, 8 within 20.

    posted by: Bithead on 06.30.04 at 06:54 PM [permalink]

    Jonas: hey it seemed that way to me at the time. I was a not-very-streetwise eight year old from rural Wales, and the idea that there were such things as machines that would give you Coca-Cola was just like science fiction heaven!

    posted by: dsquared on 06.30.04 at 06:54 PM [permalink]

    D2: How about actually responding to Drezner's point about the reaction of competitors to WalMart's innovations being a key part of the productivity surge at the retail level? BTW, that point begins to mitigate (not rebut, mitigate) Kramer's well-taken point about transportation costs, since these competitors are often in dispersed locations.

    posted by: jt on 06.30.04 at 06:54 PM [permalink]

    Jeesh, all this talk about WalMart - what a bunch of high-falutin' maroons - Sam's Club is where the real action is. :o

    posted by: UR-Idiots on 06.30.04 at 06:54 PM [permalink]

    JT: I'm not sure if you realise it, but your post would sound a lot more polite if you had ommitted the word "actually".

    I am suspicious of the statistics quoted, frankly. Mr Drezner noted in his original review that they are not well sourced, and long experience of the MGI leads me to be very suspicious of them. I think it's very difficult to distinguish between "competitive response to WalMart" and "the general diffusion of technological improvement". I would guess that what we are seeing is the second, not least because my understanding is that retail productivity changes (as measured) in the USA have not followed the regional pattern you would expect to see if it was a WalMart effect; ie, there is no productivity gap between the coasts and the MidWest.

    posted by: dsquared on 06.30.04 at 06:54 PM [permalink]

    “Nor do we yet have our hands on how much of the cost reductions are the result of worker speed-up. I'm much more optimistic about this than DD is, but his position is not stupid...”

    Is this accurate---or are a number of leftist academics finding any excuse not to believe that the American economy isn’t dramatically improving? Who is Brad DeLong? He’s an economics professor teaching at the ultra liberal campus of Berkeley. The man is a free trader and argues for nuclear energy. In other words, DeLong may be perceived as something of a right wing fanatic among his peers. He's also being treated like a punk by John Kerry. The mealy mouth Massachusetts senator lets people on both sides of these issues believe that he is on their side. Does anybody know where flip-flopper Kerry stands on the economic issues of the day? Does Kerry even know?

    posted by: David Thomson on 06.30.04 at 06:54 PM [permalink]

    D2: OK, thanks for the response.

    "I think it's very difficult to distinguish between "competitive response to WalMart" and "the general diffusion of technological improvement".

    I do find that persuasive on first glance. In general, retailling is an intensely competitive sector with frequent failures and reorganizations of even the most prominent firms (see K-mart but examples abound). So WalMart would only provide some additional competitive pressure to what is already a high level of pressure.

    I just posted this on the very interesting Crooked Timber response section but I'll ask it here. How does the high degree of pressure a large firm like WalMart exerts on manufacturers to lower their prices and improve their distribution systems show up in the productivity statistics? I know from personal experience that the pressure is relentless.

    Thanks in advance.

    posted by: JT on 06.30.04 at 06:54 PM [permalink]

    Thought of another point: WalMart has also forced the consolidation of numerous competitors. To my businessperson's mind, that qualifies as promoting enhanced productivity. Is that opinion justified?

    DThomson: please. We're trying to have an informed cross-party discussion here.

    posted by: JT on 06.30.04 at 06:54 PM [permalink]

    JT: inasmuch as the manufacturers are genuinely increasing efficiency, yeah, it's a legitimate improvement. Inasmuch as they're just squeezing thei own profit margins (or achieving their "increased efficiency" through sharp labour practices), it isn't.

    posted by: dsquared on 06.30.04 at 06:54 PM [permalink]

    But how can you tell the difference? I think you're problem is with the measurement of productivity itself and the question of whether increased productivity is actually a "social good" or "good for society" (pick your phrase).

    One other thought: even without questioning the basics of productivity as a measurement and as a concept, you could argue that WalMart is not increasing productivity per se but simply taking away part of the "value chain" (to use some consultant-speak) from manufacturers and distributors. Not a deep thought but worth pondering.

    posted by: JT on 06.30.04 at 06:54 PM [permalink]

    > How does the high degree of pressure a large
    > firm like WalMart exerts on manufacturers to
    > lower their prices and improve their distribution
    > systems show up in the productivity statistics?

    Again, everyone is assuming that Wal-Mart suppliers hold product quality steady when they meet Wal-Mart's price and schedule demands. That just isn't true. Go to Wal-Mart and buy an electric drill. Then go to Lowes and buy the same drill (same manufacturer and model number). Disassemble both drills on the kitchen table and you will be in for a surprise.

    Just because the shelf price is lower at Wal-Mart doesn't mean that the consumer is getting a better value.


    posted by: Cranky Observer on 06.30.04 at 06:54 PM [permalink]

    Wal Mart crowding out other retailers is certainly true in some areas, decreasing convenience shopping for some, so some of the productivity gain is lost by a shift towards longer transportation costs. Almost certainly correlated with population & store densities.

    Airlines should also provide a reasonable market for studying, and it's clear that a huge number of folk prefer lowest cost, first. Yes, good food, service, comfort are "important", and will be asked for in surveys or complained about in word of mouth -- but in market decisions price seems hugely dominant.

    K-mart in Europe sold out to Tesco; and Tesco seems to be copying the Wal-Mart model, as is Carrefour and Hypernova, among other Euro brands now in Slovakia.

    Certainly transportation is a significant issue for folk who frequently take trams instead of driving (at $1/liter, $4/gal), while living in (paid for) flats on some $500 / month. But price dominates purchasing decisions.

    Price interacts interestingly on the phenomenon of "too much" choice. Assuming adequate quality and buying the cheapest is a nice, time-saving decision heuristic, until dissatisfaction at the quality of some choice forces you to increase your budget (or substitute).

    posted by: Tom Grey on 06.30.04 at 06:54 PM [permalink]

    ; and Tesco seems to be copying the Wal-Mart model

    No it isn't (because it couldn't; big box retailing as a business model is more or less impossible in the UK due to our planning laws). Tesco has its own business model. I also think you've got things exactly back to front if you think that Carrefour is copying WalMart; I could make at least as good a case that it was the other way round.

    Finally I'm absolutely aghast at the gerrymandering that Dan describes in his update. It appears that the only adjustment for different levels of value-added in retailing that the McKindroids made was to chuck an arbitrary 15% onto the cost base of European retailers because they have bags packed by the checkout staff rather than separate employees. That's flat out crazy.

    posted by: dsquared on 06.30.04 at 06:54 PM [permalink]

    I'm surprised by Cranky's charge that manufacturers have different assemblies for Wal-Mart. I know that my company can't afford to have parallel productions like that, but maybe others do.

    With respect to: "As a noneconomist, I took one of DD's central points to be that one of the reasons Wal-Mart (like) institutions paint such a rosy picture of productivity is that they have avoided one of the central costs of retailing: the expense of moving goods to where people live."

    I agree this was one of the central points, but in my experience (with I will free admit only a single company and only for a short time) shipping costs per unit are lower to WalMart than to downtown stores. (I learned all about that at a very comprehensive orientation). They would be higher if WalMart were only ordering as many units as the downtown stores, but they order many more units. Shipping large numbers of units slightly further is much cheaper than shipping smaller numbers a shorter/more convenient distance.

    posted by: Sebastian Holsclaw on 06.30.04 at 06:54 PM [permalink]

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