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It reminds me of a story I read via Joel on Software:

> In one of Gerald Weinberg's books, probably The Secrets of Consulting, there's the apocryphal story of the giant multinational hamburger chain where some bright MBA figured out that eliminating just three sesame seeds from a sesame-seed bun would be completely unnoticeable by anyone yet would save the company $126,000 per year.

> So they do it, and time passes, and another bushy-tailed MBA comes along, and does another study, and concludes that removing another five sesame seeds wouldn't hurt either, and would save even more money, and so on and so forth, every year or two, the new management trainee looking for ways to save money proposes removing a sesame seed or two, until eventually, they're shipping hamburger buns with exactly three sesame seeds artfully arranged in a triangle, and nobody buys their hamburgers any more.

http://www.joelonsoftware.com/items/2007/09/11.html

Short-term goals with little or no consequences are the problem.

Somewhat more strongly substantiated (but not proven) was American Airlines removing an olive from first class salads and it saving $40,000 - $80,000 (claims vary). http://skeptics.stackexchange.com/questions/5935/did-removin...

$40-$80k is basically nothing to an airline like American. This kind of penny pinching is what kills your reputation in the long run and saves effectively nothing.

It works because of the short term nature of modern corporate goals. A lot of stockholders are institutional investors looking to buy low and sell high, rather than long term stakeholders in the company. Neither they, the board and there for the CEO has any reason to see beyond a 1-2 year horizon unless the company is in really good shape.

I think there is quite a lot of related irrationality outside the corporate world. You see it in environments like a committee of volunteers running a club for hobbyists. "Subscription income is down therefore we must raise our subscription fees" seems to be obvious and common sense to many, maybe most people. Pointing out that this is most likely to have the deadly unintended consequence of driving current members away and further reducing income often seems to be fighting against the tide.

The tide you are fighting probably isn't irrationality but limited resources. If you have zero resources to ramp up marketing yet have fixed costs that must be met then its basically raise fees or close the club. Companies can take on debt\sell equity but that door is not open to everyone and doesn't stay open forever. If you have a way out of downward spirals caused by lack of resources please share!

"Tax revenue is down so we must raise taxes"

Yep, definitely happens a lot outside the corporate world.

It also works as "Tax revenue is up, so this is proof that taxes are not too high, so we must raise taxes".

You get the reverse too. Tax revenue is down, so we must help the economy grow by reducing taxes. Tax revenue is up, so clearly we are taxing more than we need to and we can reduce taxes.

Taxation doesn't quite fit the pattern we're talking about here, anyway. If a TV channel increases its ads, the obvious failure mode is that viewers go elsewhere instead (and hence advertisers spend less and revenue falls). But inter-country mobility is small enough that even quite large changes in tax rates aren't likely to make a lot of taxpayers go elsewhere. You occasionally hear rich famous people threatening that if some potentially tax-raising party comes into power they'll leave the country, but they don't generally actually do it.

(That may be different for corporate as opposed to individual taxes. Large multinational companies may be willing and able to move their operations around to minimize the taxes they pay.)

I believe he was thinking of runway economic effects -- e.g. tax revenue is down so 'Let's increase taxes!', while doing so could lead to further economic slowdown and less taxes; this effect is less obvious and doesn't necessarily happen imo.

Yes. Perhaps it also works when you decide to cater to the x% of consumers who are quality-insensitive. Many people will endure years of bad service, complaining the entire time while taking no action.

I imagine someone there has figured out the inflection point where they can reduce the quality of their service without losing a significant number of customers. But perhaps that's giving them to much credit.

>consumers who are quality-insensitive

That is one benefit of the modern internet. As a customer that is quality-sensitive about many products, I can 'evangelize' to insensitive customers and attempt to bring them into the fold and start demanding better quality products, thereby increasing the quality I receive from the product myself.

In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me.

> In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me.

When you put it that way, it does sound implausible. But it demonstrably happens, so lets consider how that explanation may be wrong.

You don't necessarily have to fool a lot of sophisticated investors, you have to fool people/firms with sufficient funds available to invest, who can be talked into the belief that they are taking advantage of opportunity the rest of the market is missing, perhaps one which is uniquely available to them because of synergies.

Often this can be one person or firm rather than a lot of investors (sophisticated or not) -- its not as if acquisitions where the acquirer pays above market price and ends up a few years later taking a huge charge when its expectations fail to pan out are unheard of.

And this makes sense. If firms can make foolish decisions in running their business which negatively impact the future of the company, one form this can take is buying some other business at an unjustified price where someone else had already made a foolish decisions that negatively impacted the future value of that business.

I'm sure it happens here and there. But generally? No. The people who make the bulk of the trades (i.e. move the markets) have every incentive to not buy at a high price a company that has eaten their seed corn. They employ analysts whose sole job is to investigate those companies.

If you know of specific companies that have destroyed their future for a short term stock gain, you stand to make a fortune by short selling the stock.

That doesn't really add up, though. The expected future performance of a company is baked into the stock price. When companies do short-term things often the price of their stock falls even as profits rise. Investors aren't stupid.

I'll stipulate efficient market theory and all that.

But doesn't that depend on a significant fraction of investors being rational and having pretty good information? And on markets not being "rigged"?

And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones.

I considered editing the post to include the caveat "Where that strategy could make sense for an executive is when he's able to hide (or at least obfuscate) what he's doing."

>And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones.

That's sort of an odd way to put it. By definition the market transactions reflect the knowledge of all investors, unless you're postulating they don't apply knowledge when they trade. Do you mean the stock price is influence by people without knowledge other people do have? That's true.

But professional and institutional investors have the most influence, and they've got a pretty good idea when managers are eating the seed corn. It's an obvious strategy for executives, so professional investors are always on the lookout.

Do some executives get away with padding their bonuses through short term strategies? Sure. But I think it's rare.

Which is probably why companies such as Ikea, Maersk and Google are doing so well; They have a founder, or descendant that is in control of the company and can thus make long term decisions.

This is true. Some founders seem to have planned their company well beyond their lifetimes. When they retire, MBAs move in.

And that is when the evil begins.

I always said that, in the small businesses I've been involved with, "shit runs downhill". The nicest places to work with have good guy owners. The worst ones have bad guy owners.

Obsessive compulsive behavior on a societal level.

Beware the Local Maxima: http://www.iafrikan.com/2014/07/07/beware-the-local-maxima-p...

It also works because, in the words of noted historian Robert Conquest (RIP)

"The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies."

It works because modern corporate governance is exclusively concerned with quarterly growth, and the negative effects of these strategies come next quarter when the CEO has moved on. You don't get a bonus for playing the long game; in a public company you have everything to lose and nothing to gain from compromising this quarter in exchange for next.

One of the many reasons (alongside Sarbanes-Oxley) that some large tech companies appear to have chosen not to IPO.

Have they? What large tech companies never IPOed?

Counter-examples I can think of include Google, FB, Twitter, Apple, Amazon, MS, ...

Airbnb, Uber, Stripe are the prime US examples. Flipkart/Ola in India.

Alibaba

This indeed describes a lot of systems of our times. I think it's simply people not understanding complexity and 'nature', and only caring about growth and profit. I don't know if it's an inevitable fact, a mandatory lack of insight in their own actions that lead them to fail when 'success' stops coming. It's not that worrying when it's TV, but the food industry seems to be very very skilled at that sort of idiocy too.

They keep getting jobs if they can do it, or make the numbers look like they did. It's all a shell game, and in many companies, the numbers are all that matter to the people calling the shots.

Every one of those things gives a business a competitive advantage over its rivals. So when one does it, all the others have to follow or die.

I like to look at it as a natural cycle of things rather than a pandemic of things - though the case can be made for either.

Hopefully, as it all decays and people get sick of it, the other side is reached, and the opposite becomes true... unless the government interferes and keeps bad businesses and industries afloat, or the industry colludes to maintain the status quo.

Its simple. The right thing to do for each of the next 5 quarters is not always the same as the right thing to do over the next 5 quarters.

"How a plan becomes policy"

http://ogun.stanford.edu/~bnayfeh/plan.html

NSFW language of the form "_ happens", which is part of the ha-ha-only-serious joke.

/* ahh, the irony of using a NSFW-censor to describe this link */

> It's like there's a population of con-artists who've managed to get into positions of influence in lots of companies, and will pitch and sell these ideas and make them happen

Can you really call them con men when they admit this upfront by saying they have a MBA?

It's called horrible management.

Also, this is what we get when companies only care about quarterly earnings reports. If a company only has a 3 month vision, it has to come up with schemes like this.

Planned obsolescence has its upsides. Products that last much longer than people use them are, in a word, wasteful for everyone. They could have been made with less or cheaper material, or faster, or with less engineering.

Computers are a great example, especially when Moore was still going strong, and advancement was obsoleting & retiring computers far more quickly than component failure.

Another (slightly less intuitive) example is automobiles particularly in regards to emissions. If old automobiles were not intentionally obsoleted by smog laws, they would have continued to "waste" air quality.

What you are talking about is the idea of sacrificing quality for cost in a sensible manner, so you aren't creating unnecessary cost beyond a needed lifespan. But that's not planned obsolescence.

Planned obsolescence is when you artificially shorten the lifespan of something in order to increase the sales of the product or the next generation of the product in order to generate more revenue.

I have a standard answer to planned obsolescence. It has a salt water economics spin on it, though those guys would hate this argument.

If you have a product with an active resale market. Any product with a noted higher quality will sell for a premium. At first you think that this is a boon to the seller. But the manufacturer can turn around and demand a premium. So what happens is, the manufacture gets to pull forward the secondary sale. If a use car sells for a $2000 premium on the used market, the manufacturer can probably charge $2000 more. And he gets to book that today, not five years from now when the first buy sells it.

There is a dismal reverse of this, if your product goes bad like yesterdays fish, the customer is going to demand and get a discount.

This interacts with the cost value curve for given products, meaning after a while you're just throwing money away trying to make the product 'better'. Similarly, not spending enough money results in an way crappier product than the cost of materials and labor would suggest.

The upshot is car brands like Toyota are on the premium side of the curve and it's not too hard for them to stay there. Chrysler is on the other side of the curve and is economically trapped.

>Planned obsolescence is when you artificially shorten the lifespan of something in order to increase the sales of the product or the next generation of the product in order to generate more revenue.

The strategy, as originally articulated, meant companies should use marketing to move customers to new models for status/styling reasons. It worked, too, in the car industry (which was the subject). For years the Mad Men types were able to convince people to buy a new car every two years, long before the old one was worn out.

Artificially shortening the lifespan of a product isn't profitable because of the hit the manufacturer takes to its reputation.

> Artificially shortening the lifespan of a product isn't profitable because of the hit the manufacturer takes to its reputation.

Works well for nVidia. Speculations that it's newer drivers destroying older cards' performance seemingly cannot be quelled.

You can get away with that if you can still create a superior product than your sole competitor and can even get away with deliberately lying to customers (See 3.5 GB of good memory instead of 4 GB on GTX970)

FWIW cars did have far more reliability problems until electronic control systems became common and engineering practices became sophisticated enough to manage long term quality. Much of the marketing to get a new car at frequent intervals played against the legitimate anxiety of having a car that was rusted out and unreliable after five years.

> Artificially shortening the lifespan of a product isn't profitable because of the hit the manufacturer takes to its reputation.

Isn't this exactly what Apple does with its chargers all the time? They change them in the slightest manner in newer generations, so the older generation charger doesn't work with it. I don't think there is an actual legitimate reason to do this - such as improved design or functionality. It doesn't seem to hurt Apple at all though, their hardware is still top notch and above and beyond its competitors.