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If You Ain‘t First You‘re Last

The S-curve suggests that, passed an inflexion point, the marginal rate of return on any extra unit of input diminishes. This is relevant for many processes, including in the manufacturing world: Beyond a certain capacity utilization rate, it is best to build a new factory than to push an existing one closer to 100%.

On a broader macro-economic level, there are heated debates today amongst economists about a potential global decline in productivity, which largely rely upon differing views on the shape of the S-curve, noting that technological improvement influences it over time.

Notwithstanding the above, the S-curve is far from being a universal rule. For example, it seems to me that, in a competitive environment, services providers do not differentiate themselves sufficiently from a client perspective if their output is, say, 80% of capacity (with capacity here defined as what can be expected by a client in terms of quality and quantity for a given price). That is because many services providers can relatively easily provide services equivalent to 80% of what can be expected. Therefore, services providers only start to make a real difference beyond 80%. As a customer, I know this to be true for schools, airlines, restaurants or accountants. Incidentally, I also believe it is true for investment banking services.

And it is true to the extreme for athletes too. The Olympic British Cycling's performance director Dave Brailsford made the best out of the rule of marginal gains which flies in the teeth of the S-Curve: “The whole principle came from the idea that if you broke down everything you could think of that goes into riding a bike, and then improved it by 1%, you will get a significant increase when you put them all together. All the value comes from the last percentages—that is the law of increasing, not decreasing marginal returns. Because, as proclaimed brilliantly in the Will Ferrell comedy movie “Tallageda Nights—The Ballad of Ricky Bobby“ii, in many situations, “If you ain't first, you're last.”

For services activities, then, the reliance on the S-curve concept might be highly counterproductive. Providers may burn significant resources to generate an 80% output, mistakenly assuming they would be able to achieve an acceptable market share and to cover their cost of capital on a sustainable basis. In fact, however, they might achieve little more than nothing. True impact and value-creation through the achievement of abnormal returns is only possible beyond the 80% threshold.

If the above is correct, the S-curve, whilst king in manufacturing, should be fought back and totally inversed when it comes to services, as illustrated below.

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