February 28, 2008
Is there a cost-quality tradeoff?
One of the illuminating koans of management directs attention to the production possibility frontier in a space defined by "good" and "cheap". My late colleague Bob Leone taught me that while there obviously is one, no real organization is actually operating at that boundary, so we should assume we can make stuff both better and cheaper and see what happens. This in turn raises the question whether management should push in the direction of quality and hope cost savings will follow, or push on costs and hope for quality improvement. The answer to this is well known: go for good and cheap will happen, but if you push on costs, quality will fall. Here's a classic illustration: Sprint-Nextel is going down the drain because its management tried to cost-cut its way to profitability and ruined the reputation of a "product" that is, when you think about it, nothing but disembodied service, hence quality.
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