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Pain now can pay off

Sacrifice the short term and benefit later

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One of the most painful decisions entrepreneurs face involves trading short-term pain for long-term advantage.

When I was working for the Boston Consulting Group, one of our clients was a company that made cathode ray tubes (CRTs). The client had just built manufacturing facilities for their latest generation technology, which had gained wide market acceptance. Their engineers developed a new technology that would allow them to produce higher resolution and more durable CRTs for far less.

However, if they were to introduce the new technology, they would devastate demand for their current product and would be faced with millions of dollars of loss on their existing line.

So they waited and continued to sell their profitable old technology. Unfortunately, a competitor who did not have the big investment in the old technology and no losses to incur soon announced the new technology for immediate delivery. By the time our client responded, they had lost their dominant market position and ultimately left the CRT business.

In his insightful book, "The Innovator's Dilemma," Clayton Christensen discusses this very problem. Introducing a new, better, less-expensive product or production technique may disrupt a company's entrenched way of doing business.

He refers to these innovations as "disruptive technologies." Merrill Lynch responding to Charles Schwab's innovation of online brokerage would mean cannibalizing their broker network. General Motors allowing customers to go online to order automobiles directly from the factory would save millions of dollars of cost, reduce over-manufacturing when demand drops and allow GM to build direct relationships with customers. Unfortunately, it would also bypass and antagonize their powerful sales and dealer network.

Changing to take advantage of new technology often involves serious and painful change to the way a company currently does business.

The painful trade-off affects everyone. California is currently facing skyrocketing energy prices, and the governor wants to cap energy prices. This will reduce the short-run pain to voters. However, before the discussion of price caps, companies were enthusiastically rushing resources to begin the long process of building additional capacity to capture the high profits currently available.

Now they are slowing the process to wait and see what will come out of the discussions. If price caps are put in place, Californians will have less incentive to conserve, and demand will continue to rise. In the long run, if price caps are put in place, less capacity will be built, demand will remain high and the problem will get worse.

One of America's first experiments in price caps was rent control. Rent control has been abandoned as a disaster because, after 30 years, we see that it led to no new housing being built, the existing housing getting no new investments and becoming run-down, drug-infested buildings that the owners literally walked away from. The long-run effects were much worse than the short-run pain.

The owners lost, the renters lost and everyone experienced serious pain much larger than the short-term rent increases would have caused.

Eventually the short run becomes the long run. Knowledge of the long-run benefits of short-run sacrifices is insufficient. You must have the wisdom to actually make those sacrifices.


Hal Heaton is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu .