Handle’s theory of consolidation

Tuesday, November 28th, 2017

Hayek claimed that local knowledge favors decentralization. Socialists hoped that cybernetics — what we’d now call “IT” — would overcome this problem. Handle thinks we’re just about there:

IT and increasingly capable and sophisticated management information systems, which themselves benefit from massive economies of scale, and the management techniques they enable, has invalidated this argument. If anything, big companies now seem to have a clear advantage with regards to acquiring and leveraging “local knowledge,” and combined with the other advantages of brand recognition, size and sophistication and capacity for, e.g., rent-seeking and bearing the burden of compliance overhead, that leaves “the little, genuinely-independent guy” with zero chance in the long run.

The Internet vision of the 1990s is turning out to be wrong, Arnold Kling adds.

Comments

  1. Kirk says:

    Bullshit.

    The problem with this idea is that those “increasingly capable and sophisticated management information systems, which themselves benefit from massive economies of scale, and the management techniques they enable” are mostly figments of the imagination of the MBA class that has bankrupted innumerable corporations, and fucked up this country and world beyond all recognition.

    The more you try to centralize control, the less you have. The more power you aggregate to the center, the less efficient you are, and the less responsive your firm is.

    Ever wonder why the hell your local Walmart or Home Depot has these odd little problems with keeping certain things in stock? Why it is that the local manager just shrugs, and says that the planogram comes from corporate, and he can’t do a damn thing about your favorite product going off the shelf, when it used to sell like gangbusters?

    Ever wonder why the staff at these stores is so incompetent and uncaring? Boils down to one factor–The companies are run by idiots who have the insouciant certainty that they can “know everything” at six removes from the customer out in Knoblech, ND, and that their knowledge means anything outside the local environs of New York City.

    The poor bastard running the stores out in the hinterlands can’t do shit when it comes to meeting local needs. The computer algorithm back in New York knows all, and manages all, and it’s illusory expertise is worshiped throughout the corporate boardrooms of America. Meanwhile, you need a particular product, go into Walmart to buy it, and discover that that SKU is no longer stocked. So, you go to Amazon, order it, and it’s delivered to your home two days later. Meanwhile, you go to Walmart less and less, and the corporation wonders why they’ve lost market share.

    Same with Home Depot, Lowes, all the usual suspects. It’s amazing how inept these big box stores are, when it comes to meeting needs. I go to them for the loss-leaders, and immediate can’t-wait needs, and that’s it. Everything else, they’ve lost me on, and it’s mostly because of the idiotic way they run the system.

    For the love of God, do you realize that you can’t even log on to the Costco website to find out what’s stocked in the local store, and that most of the online SKUs aren’t what’s in the stores? And, that you can’t actually find out availability for what’s in the store at a given moment?

    For most of the people who run Costco, that’s not a big deal: They’re city folks, who live down the road from their local store. For people out in the hinterlands, where a trip to Costco is damn near expeditionary, the fact that you can’t find out what’s actually in the store is a major motivator not to shop there. Costco online is virtually a separate entity from the stores, and when you ask the managers why this is, you discover that the inventory control software the stores use is primitive as hell, and can’t talk to the internet in any way, shape or form. It’s still the same crap the warehouses were using back in the 1990s, ferGawdsakes… MS-DOS based, as a matter of fact, per what he told me.

    In a few years, the retail industry in the US is going to be dead, and they’ll have done it to themselves. Suicide by MBA.

  2. Handle says:

    Kirk, Home Depot and Costco and even Walmart represent a prior phase of consolidation and it’s clear that their deployment and implementation of information technologies hit roadblocks on the way to full integration with the consumer internet and exploitation of possibilities. They lack full digital inventory transparency to their own management in much the same way that federal government leadership still lacks ability to search and retrieve records on demand, many of which are still stored in paper form at field locations, or tracked with ancient and incompatible local setups.

    Part of the issue is that these companies don’t specialize in logistics operations that connect to last mile delivery — which Amazon has mastered better than anyone else. Even though it’s taking a long time, these things will get done eventuality and inevitably, one way or another.

    But it’s the ability to acquire comprehensive historical information about consumers and other counterparties and to maintain updates via ‘voluntary’ digital surveillance in real time that is a new development. And only a few large internet-related companies have that: Google, Facebook, Apple, Amazon, and maybe the ISPs. The typical person can walk in and out of Home Depot a complete stranger, but he approaches Facebook as a comprehensively known quantity (and all his friends too).

    That enables entirely new levels of management control and logistical efficiency, but also reveals entrepreneurial opportunities that only entities with access to comprehensive, real-time databases of individual information can discover and exploit quickly (or be paid to provide). That’s why Facebook is “free” in money; people are paying in terms of letting Facebook acquire all that extremely valuable information. And that’s why it doesn’t matter how much profit Amazon is making (or not making) selling goods, because in the meantime, they got a seat at the table acquiring juicy informational capital.

    And the broader point is that there are only a few possible seats.

  3. David Foster says:

    Kirk: “The more you try to centralize control, the less you have. The more power you aggregate to the center, the less efficient you are, and the less responsive your firm is.”

    Yep. A classic case being the chain stores in South Florida which had snowblowers in stock as a result of the chain’s centralized “push” inventory system.

    An elegant explanation of the problem was given to the writer Rose Wilder Lane in the 1920s when a Russian village elder explained to her why her then-infatuation with Communist central planning was mistaken:

    “It is too big — he said — too big. At the top, it is too small. It will not work. In Moscow there are only men, and man is not God. A man has only a man’s head, and one hundred heads together do not make one great big head. No. Only God can know Russia.”

  4. Sam J. says:

    I agree but in the long run it doesn’t matter how incompetent these stores are. They have access to capital and purchasing power that a small business can only dream about. Many businesses go to Walmart and Sam’s to buy their products because there’s no way they can touch their prices.

    They lose a bit on stuff that is not big in the supply chain but if you want it now there’s no place to go but to them.

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