In my junior year of at the University of Texas, I took Dr. Valerie Bencivenga’s course on macroeconomic theory. A topic that we briefly touched on was economic and knowledge spillover. Spillover occurs when innovation made by one economic agent benefits others who did not participate in the research and development. The internet is the iconic example of spillover, Amazon, Google, Facebook, all exist only because the internet was created. They have in-turn created technologies (cloud computing, improved search, social networks) that have spilled over and benefited countless other firms.
I think spillover stuck in my head, in part, because of William Easterly’s entertaining and accessible book on economic growth. In one chapter, Easterly relays the history of Bangladesh’s garment industry. Bangladesh’s garment industry was essentially created by Daewoo, a South Korean conglomerate in order to comply with the Multi Fibre Arrangement. In 1974, Daewoo partnered with Desh Garments, a Bangladeshi textile company and brought 130 Bangladeshi employees to their state of the art facility in Korea for training. These employees were taught the most up to date methods for manufacturing ready to wear garments. Less than a year later, 115 of the employees had left Daewoo/Desh to work for other firms or start their own garment manufacturing firms. Today, Bangladesh’s garment industry accounts for ~80% of the country’s manufacturing exports.
On a corporate level, spillover happens when executives leave one company to work for another and bring their experience with them. Experience informs decision making at their new job. The COO of Freebird’s, a fast casual burrito restaurant with around 100 locations, previously worked for McDonald’s and Chipotle. Freebird’s will benefit from their COO’s prior work experience with two of the most successful franchises in the world. He has already learned how to deal with several problems that Freebird’s will encounter as they continue to grow.
You don’t have to hire away an employee to learn from another company, much can be learned from a careful examination of how they operate. For instance, Trader Joe’s and Aldi have all informed grocery store operators on how to keep costs down by limiting the number of stock-keeping units (SKU’s) they hold in inventory. Limiting the number of SKU’s you have in-store reduces the amount of employee time needed to restock the store, lowering labor expense. You also will benefit from increased bargaining power with suppliers because of higher sales volume per SKU. Additionally, there has also been economic research positing that limiting choices leads to higher sales. If you’d like to read more on SKU management and other retail lessons, Competing in Tough Times is a great place to start.
Here is a quick check list of how to implement what we have discussed today:
1. First, focus on your business.
2. Occasionally, step back and observe your competition.
3. Learn from their successes, avoid their mistakes.
4. Keep an eye out for new beneficial technologies.
Someday soon, you will notice Colton’s sincerest form of flattery springing up all around you: imitation.