#190: On the sunk-cost treadmill

During a recession, competition increases. That’s common sense. What is not, is the automatic merger mentality it spawns.

I think this mentality stems from a belief that size beats all. In business, size is having the capacity to produce in volumes large enough so that your product becomes the cheapest.

Here’s the rub: 'sunk costs'. Once you have invested millions in a merger or a facility that can churn out huge volumes cheaply, you will be very reluctant to write-off that investment to produce something different, even if your customers demand it.

You're sunk in more ways than one, because an obvious side-effect of increased output is the need to find more customers. The outcome? Increased competition! And increased competition means that you must invest to become more efficient than your competitors. Or merge with them.

Am I the only one who smells a treadmill here?


I’m james@nonsenseatwork.com

Copyright: 2008 James Henry McIntosh

James can be heard on Public Radio, 88.9 FM WCVE, Richmond VA.
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