How many Target stores should there be? Pose that question to an economist and prepare for an enthusiastic lecture on the magic of markets and distributed decision-making to guide outcomes. That rhapsody is likely to overlook an important real-world detail. It is actually someone’s job to make that call. Like some Soviet apparatchik, there’s a man or woman in a position of authority in the company who owns that decision. After Smith’s “Invisible Hand” completes its mysterious wave, someone in a senior role has to choose. How many stores? Where and when?
They don’t always get it right.
We are living through a crisis in the power and relevance of government, undermining the democratic institutions on which on our freedom and security have depended. Amid this turmoil, private, profit-driven institutions like corporations are thriving, taking on roles and services in public life that our ancestors never imagined. It makes sense to look carefully at the structural advantages of market-driven institutions to understand why they seem to outperform public institutions in so many ways. If we hope to leverage the power of private organizations toward the public good, we must also be conscious of how those companies fail and why.
It seemed like a good idea at the time. Canadian retailer, Zellers, was in deep trouble in 2011 and looking for help. Target had lagged behind Wal-Mart which had begun its foreign expansion in the 90’s and was well-established in Canada. Zellers’ distress offered a great leap forward that could catapult Target into a powerful market position. Instead of buying Zellers outright, along with its existing supply chain and infrastructure, they leased and closed 220 of their locations, retaining none of the Canadian staff. Zellers briefly retained a few dozen stores, but was left to wither and die.
It turns out that Zellers was struggling for some good reasons. Buildings poorly configured for Target’s operations were sitting in locations inconvenient for Target’s shoppers. Having acquired no senior Canadian talent in the deal, Target struggled to navigate supply chain, marketing, regulatory and cultural crosscurrents. As the new ventures began opening in 2013, Canadians with favorable Target experience from the US were greeted by ugly new stores with empty shelves.
Capital costs imposed by such a massive push piled up while revenues disappointed. Within less than a year, the young president of Target Canada who had worked his way up the chain after starting at the company out of college, was fired. In January 2015 the company announced a $5.4bn loss on the project and began shutting down Canadian operations.
Target isn’t alone. Wal-Mart experienced similar failures in Germany and Japan. Its German debacle alone racked up nearly a billion in losses. Lessons from these failures have some relevance to public policy. Trying to go big, fast, in an unfamiliar environment brings inevitable costs and errors. Wal-Mart’s success in Canada and Mexico came relatively slowly, with a run of test stores and intense efforts to incorporate local knowledge. On-premise retail is a very personal exchange even in a large store. The larger the cultural distance between a company’s C-suite and its retail customers, the greater the cost of bridging that divide and achieving success.
When the national enrollment website for Affordable Care Act was rolled out at the end of 2013 it was a disaster. Its original budget was roughly $90m. By the time the site was available costs had risen to nearly $500m. When most major issues had been resolved a year later costs were approaching $2bn. Throughout this time, many state level exchanges were operating their websites at very low cost with high levels of customer satisfaction.
Needless to say, the cost overruns and efficiency problems with Healthcare.gov were issues of huge national prominence, casting doubt on the ability to government to deliver key health services. Interestingly though, no one looks at the inefficiency or incompetence of Wal-Mart’s foreign expansion to paint corporations as inept. There is an important difference in these stories of institutional failure, public and private. In the private sector, failure tends to come quickly. Consequences aren’t suspended while politicians bicker and voters make up their minds. The axe falls.
The bright young face who climbed from the bottom ladder of the company’s merchandizing ranks to captain Target Canada is no longer leading a major corporate operation. A company backed with billions of dollars in investment capital along with the expertise and infrastructure of a corporate giant lived to the ripe old age of four.
Corporations aren’t thriving because markets are perfect or because corporations possess some virtue missing from public institutions. Corporations are thriving relative to public institutions thanks to their relentless exposure to competition and failure.
Out of that rapid evolutionary churn has emerged a decisively important trait – an increasingly superior capacity for parallel processing. Someone made the final decision to invest in Target Canada, but that project wouldn’t have been possible absent a lower-level decision structure in which millions of decisions are distributed out across masses of people and time. In order to survive, businesses distribute rather than centralize their decisions to a much greater degree than governments in a liberal democracy, bound by rule of law, are allowed to achieve.
Free from the constraints of electoral politics, businesses can also react more quickly to changing conditions and cut off failed policies. While Target Canada lands in a dumpster, the federal government continues to billions into the F-35 fighter jet. That private sector parallel processing advantage threatens to open into a chasm as opportunities emerge to leverage cheap massive computing power and AI for smarter decision-making.
If you want to ruin the power of businesses to innovate and succeed, just insulate them from competition and protect them from failure. Likewise, if you want to see public institutions adapt some of the habits and characteristics of the best private entities, expose them to forces that weed out poor performance and open up massive new channels for decision-making and experimentation. There are aspects of public institutions that make this kind of flexibility difficult, especially in a liberal democracy, but they do not close off every such option.
Liberal democracy may be sputtering, but we may have remedies available to keep it healthy if we have the simple humility to recognize them. Our founders organized our system with some built-in options for distributed decision-making. Our states, along with a dense network of relatively powerful local governments, form a ready-made test ground for policy innovation.
If “Medicare for all” is such a great idea, why hasn’t California or New York already done it? We already possess a system allowing for a great diversity of localized experimentation and innovation, we just don’t recognize its power. Massachusetts already enjoys a 95% rate of health insurance coverage and almost universal coverage for children. Our attempt to port their plan onto the federal level has been a sputtering, costly failure. We don’t all live in Massachusetts. What works there will not necessarily work in Mississippi or Oregon. Our system makes local innovation possible, an option for democratic success we ignore at our peril. Did free markets work for Target Canada? Yes and no. Exposure to market forces did not lead Target’s executives toward optimal decisions in the style that economists draw up in the classroom. Someone made a choice and that choice was a multi-billion dollar bankruptcy accompanied by many lost jobs. On the other hand, the operation’s swift bankruptcy is the kind of evolutionary cleansing that eludes public sector institutions.
As data becomes the currency of a new world, speed is key to survival. If we value our public sector institutions, we need to learn how and when to let them fail.
This post is part of a series exploring what’s next after liberal democracy and what we should do to prepare. Much of this material was covered in The Politics of Crazy, though from the perspective of a more optimistic era. The work fits better as a whole, but reading through a 6000+ word piece on a computer seems impractical. When these are complete I’ll gather them into a series of links on a single page.