Arnett, Jr., MD, Jerome
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A Diagnosis of Corporate Pathologies
By John Baden :
| 22 Oct 2020
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Economists have no monopoly on tools explaining the pathologies that afflict organizations. However, their approach offers some illuminating insights. Here's one -- within an organization decisions are made on the basis of information and incentives faced by the decision maker.
Consider business practices that alienate customers and clients. Surely no business with a general clientele, such as Amazon, Home Depot, or Kmart, has this as a goal. Yet it occurs. Why?
The offending employee may be evil, bitter, or malicious, but economists have little to say about individual characteristics. Rather, economists examine the incentives and information facing the person who annoyed or harmed the customer. Here are two examples.
The Wall Street Journal
recently featured an account by Laura Landro, one of their senior editors. In preparation for her granddaughter Emily's new school term, Landro, who is responsible for all New York reporters covering the media and marketing, took her shopping at Kmart. Her and Emily's mother together spent "more than $800." When they went to pay at the register, their haul included a pair of loose flip-flops that had, in error, been put in the wrong box. Big mistake. Landro was accused of cheating the store out of $8.
She notes, "retailers face a daily battle against scam artists. But let the customer beware: With security on high alert, even law-abiding shoppers can fall under suspicion." Eight dollar error detected, she was taken to a security room, detained for an hour, and accused of deliberately switching a more expensive item into a cheaper box. Her driver's license and credit card were temporarily confiscated. She was told to expect a civil notice of a fine and the security guard "Š told me I couldn't come back to the store; I assured him I had no intention of returning to any Kmart, ever."
The security guard did nothing wrong; he had incentives to follow company policy and he did so. The results, however, were surely perverse. While Kmart's practices no doubt reduce shrinkage generated by price switching, if misapplied, they drive good customers away.
Customers like me... I have spent too many thousands of dollars on Amazon.com and, until recently, never had a problem. They advise me of new books reflecting my interests based on my purchasing history. I have a weakness, perhaps an addiction, for books.
Earlier this year I received notice of an Amazon credit card that offered special privileges and discounts. I signed up, and placed an order.
I always immediately pay credit card bills. A bill with my initial charge of $43.08 never arrived. The first statement received included a late fee of $15.00 and a $1.00 finance charge. I, of course, protested. Alas to no avail.
I first sent a letter protesting. Then called and went through an interminable phone tree. Then wrote again, and called again, and again. And then canceled my card and received another late fee added to the first. It was clear that I would not receive satisfaction.
I often lunch with my primary banker and shared my plight and genuine anger at Amazon with him. Suddenly, with his help, the problem became clear.
My new Amazon card wasn't really with Amazon. Rather it was a Chase Bank "affinity card" sponsored by Amazon. Apparently, Amazon has an arrangement with Chase to offer this card. In return it receives some small percentage of each charge.
The bank has many such affinity cards. The person receiving complaints about charges has incentives to collect all payments, late charges, penalties, etc. He has no interest in customers' feelings toward Amazon or any other company. It is likely his performance is measured by the charges he collects.
In this case, Amazon's CFO no doubt saw an opportunity to add a small percentage to each sale by establishing an affinity card operated by Chase Bank. There is no system to note and correct sorry treatment to customers.
Huge organizations create policies that look good at headquarters. However, they often have negative consequences at the individual level.
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