Comment by syllogism | Hacker News Reader

Comment by syllogism | Hacker News Reader

This was a frustrating article, because I think it's almost right, but not quite.

It's not that mass-production kills quality or "intangibles". We don't have to assume boutique products have a quality advantage. It's just that scale is most effective on price, and price sensitivity is not linear. Once products are cheap enough, price discrimination stops being decisive.

> The true-differentiation strategy seems to work best when scale, despite its efficiencies, also introduces blind spots in areas such as ... intangibles not entirely consistent with mass production and standardization.

That isn't really what's going on. Even if the big business is good, and scale is quite useful, there are many, many small competitors. All of the competitors are making products, and some of them are likely to be exceptional. So for the big business to stay on top, scale has to be helping a lot.

If there are 100 beers on the shelf, and one of them is a mass-produced, and the mass produced one is not #1 in quality, you don't have to assume mass-production hurts quality. It just that it didn't help enough.

Craft beers are "mass produced", just not in the quantities of Budweiser. They still use huge kettles, precisely controlled quantities of ingredients, etc. They also tend to use higher quantities of good, natural ingredients and the like. SO yes, mass production in and of itself doesn't necessarily drive quality.

BUT. The size of the company can. Very large companies, particularly public but not limited to such, start drifting toward the cheapest product they can get away with while maximizing profit. That's their obligation to share holders after all. I think the food industry(including beer) is particularly sensitive to this from a quality standpoint.

> Very large companies, particularly public but not limited to such, start drifting toward the cheapest product they can get away with while maximizing profit. That's their obligation to share holders after all.

This is largely a myth. Corporate executives have an obligation to shareholders, but that obligation is not to maximize quarterly profits. Short term profit maximization at all costs is generally not in the interests of shareholders. If you have a reputation for selling a quality product you can capitalize on it in the short term by selling a junk product at quality prices and huge profit margins, but in any kind of a competitive market that opens you up to exactly what you would expect. Someone else comes in with a real quality product at the same price and you lose all your business to them.

The reason corporate executives do things like that isn't because they're satisfying their obligation to the shareholders -- they're doing quite the opposite. But they do it anyway because of how they're compensated. Big bonus at the end of the year if profits are up; no repercussions if it tanks the company by the end of the decade because by then you're working somewhere else.

It's important to make the distinction because the shareholders are the ones who have the power to do something about it. "Obligation to the shareholders" makes it sound like the shareholders are the beneficiaries, but they're just as much victims as the customers. Making that mistake is how they become the victims.

I wonder why they are so common though.

My theory is that we have too much diffusion of ownership. When Foo Corp is majority owned by four dozen mutual funds which are in turn owned by ten million different people, there is nobody minding the store. The mutual fund managers are picking a stock to make up ~1% of their fund, and they have the same perverse incentives as the executives. The individuals who are the real parties in interest don't even know what companies their money is invested in.

Does the mutual funds actually push for such people or is it caused by the culture or something like that?

Don't think of it as a problem with specific people. It's systemic. You tell a CEO that he gets paid primarily based on how much profit the company makes this quarter and he's going to start slashing long-term R&D and burning the office furniture for heat.

But you're asking why funds invest in companies like that or prefer that method of compensation. Part of it is just laziness. Investing in a company or rewarding a CEO who posts big profits seems intuitively sensible and is easy to measure. It's a lot more work to do the investigation it takes to realize they're going to crash and burn and you could be the one holding the bag.

Another factor is that fund managers are often compensated using the same methods. If the fund does well in the short term then they're rewarded. The companies dedicated to short-term profits do exactly that, as long as the market doesn't factor in the long-term value before you divest. But the bonus if it works goes to the fund manager whereas the risk is to other peoples' money.

oh, so that's why they lay off staff during record profits.. to not maximize short term profit to share holders?

Craft beers are mass produced but sourcing ingredients that meet their requirements may or may not be scalable.

Massproduction guarantees that there is no variation in quality. Whether the product is of low or high quality depends on other factors.

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