Tuesday, December 30, 2008

Exit or Voice

One of the things you learn running a business is that unhappy customers rarely tell you they are unhappy: they just buy elsewhere. It's a classic example of Alfred O. Hirschman's concept of Exit or Voice, first developed in 1970. In a nutshell: an unhappy customer (or employee or citizen or spouse) usually has two options when they are unhappy with a situation - they can either tell you they are unhappy and why, or they can leave the relationship that is making them unhappy.

2009 is going to be a year of Exit or Voice for many of us. Take the issue of competitiveness. I was talking to a business man today who owns a manufacturing company with factories in Ireland, England and Eastern Europe. He reckons his English manufacturing costs are 30% lower than his Irish costs. His Eastern European costs are about the same percentage lower than his English costs. He made these calculations before the recent weakness in sterling against the euro. Expect parity any day now. The recent Global Competitiveness Report 2008-2009 ranks Ireland 22nd in the world for competitiveness, by the way - the UK is ranked 12th. We're a long way behind.

How do we become competitive again? Remember, firms compete - not nations. So it is the individual response of thousands of businesses that will determine how effectively we cope with our worsening competitiveness. The short run response will be to source cheaper inputs if you are a manufacturer or retailer. Cross-border shopping is not just for consumers. But more and more private employers are going to offer their own form of 'Exit or Voice' to their employees, i.e.: ask them to take a pay cut or to find employment elsewhere. It won't be pleasant, but it might be good for the economy overall, as anticipated by John Fitzgerald.

Like I said in my previous post, the size of the private sector relative to previous recessions means that we now have 'built-in-destabilisers' which means a far faster response to deteriorating economic circumstances in the past. And hopefully a faster recovery as things improve as well.

Longer term it boils down to productivity: investing in the hardware, software and employee skills necessary to deliver more for the same or less. The problem then is the medium term: a lot of employers might just decide to exit rather than voice their anger at our political masters - and bring the work to Poland, Lithuania etc rather than wait for them to come here looking for it. The bottom line: it isn't any business owner's 'patriotic duty' to go bankrupt waiting for our political masters to get their house in order.

2 comments:

  1. Been there done that. See, those of us in the tech sector were actually affected by the dot com implosion. In fact, looking at the figures, it was worse then than it is no in our sector. This may change mind you. In any case we had our pay cuts and redundancies while everyone else kept on trucking on the SS celtic tiger. Also waved bye bye to our DB pension. I'm glad I'm in a startup, the horizons are well defined and we can see them coming. As for everyone else, welcome to my world. Yes, of course there is some room for you public sector lads, bad fortune should not discriminate after all.

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  2. Superb, brilliant weblog structure! I like your blog post Exit or Voice and method of writing,

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