In this case, the downside to saving money by laying off expensive experience is clear. Unfortunately, the downsides are rarely clear before the upsides, and by

In this case, the downside to saving money by laying off expensive experience is clear. Unfortunately, the downsides are rarely clear before the upsides, and by the time the mistake is obvious, returning to the previous state is difficult, and an incentive has been created for short term savings at the expense of long term ones. By way of example, several years ago I sold tools at Sears. Sears had spent decades building consumer confidence, particularly in their Craftsman brand. If you bought a Craftsman tool, and it broke for any reason, they replaced it, sans receipt. As a result, this warranty was transferable - there were no questions asked. While this policy certainly did not extend to every product sold at Sears, it did exemplify a commitment to service and quality: in the words of one older person I talked to once "if you bought it at Sears, you didn't have to worry." As time went on, Sears was able to increase profit margins by slowly restricting the tool warranty, and using crappier parts. The obvious problem was that once Sears lost its reputation as a "you don't have to worry about it" store, it had to compete with stores like Wal-Mart on price[0]. The interesting problem here is not the Sears strategy, but the fact that it takes years for the effect of reduced quality to become obvious: in the short term, consumer confidence in the brand is still high, so the worse products are bought for the same prices, under the assumption that the quality is still high. By the time consumers on the average figure this out (when your drill wears down in 3 years instead of 10), someone that made the change has been able to demonstrate clear savings to the company and move on. Several people have suggested solutions. The first one I hear thrown around is "get rid of executives." I think this is shortsighted in the same way that getting rid of a good IT department is. Certainly some executives are useless, but "get rid of the bad executives" is vacuous. A more compelling solution is to create incentive structures that encourage "bad executives" to be good ones, such as incentives which outweigh the short-term gains gotten by reducing, say, IT spending. For instance, I've heard it suggested that companies use long-term equity, say 15 years out. I'm not sure how that squares with moving from company to company, but it's interesting. [0]This is not to say that the Sears quality-first business model was sustainable, merely that there was certainly a tradeoff, the effects of which take a long time to see in total.