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A shifting market paradigm, what is next for the sharing economy? Customer Collaborative Platforms #sharingeconomy

The world is evolving at a rapid pace, with new technological, cultural and societal boundaries being laid to waste by innovative business models. The traditional business cycle seems to be getting shorter, with the rise (and fall) being potentially far quicker than say 20 years ago. And, much like Moore’s Law, I feel this advance in the capabilities of businesses to fulfill customer needs will grow exponentially as businesses come to terms with the cloud, data and mobile/wearable technology and their endless possibilities. In turn, customer expectations will advance, and businesses will ever be playing catch-up with user demands. The sharing economy has been born, developed and surged in recent years, utilizing those aforementioned factors; and in the process fundamentally altering the way people expect to do business around the world. I feel that there are still substantial opportunities for both the sharing economy, and those larger companies that currently feel threatened by it.

Technology has certainly enabled businesses to build platforms that facilitate the sharing of assets already in circulation. Peer-to-peer sharing reduces the costs for the end user, as there is no requirement for an agent to moderate the transaction. Technology has reduced transaction costs, making sharing of assets easier and cheaper than ever before. This has enabled businesses operating in this space to acquire substantial market share quickly and expand operations on a much larger scale than has been previously possible. Airbnb is one such example where it now provides a service in over 30,000 cities globally, and has disrupted the well-established hotel industry with a punchy valuation of $10 billion in just under 6 years of trading. It is my belief that this emergence of a new model of consumption was driven by a desire for greater value, and less reliance on any middleman following the 2008 credit crunch.

Data has enabled businesses to disaggregate individuals’ assets into services. It has also enabled businesses to provide more contextual service offerings from other individuals based on preference, location, purchase history and peers. Sharing sites enable users to become ad hoc providers of a service, and make incremental or continuous income from already owned assets. For the end user or customer this is great, because access is more important than ownership of assets. Rachel Botsman has stated that the peer-to-peer rental market is worth $26 billion. Although there are opportunities for businesses to use this rental model for spare resources and assets, it is predominantly person-to-person rental within which they operate.

It is easy to see how “collaborative consumption” can offer greater levels of value and utility for customers, because owners can make money from underutilized assets and users can gain utility from using an asset they would not have otherwise been able to afford. This is bleeding edge capitalism, and solves the issue of overconsumption and materialism. It is focused on the efficient use of resources, which has environmental (and economic) benefits too.

Trust is inherently built into the mechanisms of these new business models with open, two-way review and referencing systems in place. Technology has enabled the platform providers to validate users, and ensure they are real people; which in turn only increases the trust of users in that platform. David Lee, founder and managing partner at SV Angles (an early investor in Airbnb) states that although a solid payment platform is paramount, the most important aspect of these business models is being able to build a trusting community and enabling users to ‘meet’ one another online before they meet in person.

There are however inevitable regulatory issues with these models, specifically around areas such as insurance, liability and tax. In 2012 the California Public Utilities Commission issued $20,000 worth of fines against three companies: Uber, Lyft and SideCar for “operating as passenger carriers without the required public liability and property damage insurance”. Frustrated incumbents will use outdated regulations to restrict, as best they can, the rise of such businesses. In many states in the USA, such companies are unable to operate and are fighting many legal battles.

Room sharing businesses are also causing a stir, and have run into issues around the zoning regulations and other rules governing temporary rentals in which the property owner is not present. Owners have served some renters notice because the renter was seen to be sub-letting the room on Airbnb. Interestingly it has recently appointed David Hantman, previously the head of government relations at Yahoo, as its head of public policy to tackle this regulatory issue.

Progressive businesses will always encounter fractious times. Inevitably regulatory bodies or governments will play catch up, mediating between the wishes of the end-consumers (which can be represented as the actions and purchase patterns of those customers supporting new business models) and the established businesses fighting to stay in the market, and keep its once loyal customer base.

Interestingly, the larger companies that face disruption are moving into the space through investment into these upstart rivals. GM Ventures invested $13 million into RelayRides in 2011. This has not only offered a vote of confidence to the sharing model, but it has highlighted how old and new business can work together to offer additional value to both the new and old business alike. In this instance, RelayRides was granted access to GM’s OnStar navigation system. Now OnStar equipped cars can now be locked and unlocked from an app, removing the need for individuals to meet and hand over the keys.

I have always felt that the sharing economy lacked any real coherent definition, and that it in actual fact was made up of many various value-adding models. And as with any great surge of capitalism it has been hacked, rebuilt and rolled out across many other markets and industries with a variety of results. The one thing that has seemed to remain fairly constant was that these models focused on the sharing of assets; it was about access and not ownership. Now I believe there is another step change in the sharing economy, and we (Aidan Rushby, Tony Edwards and myself) have built a company based on these beliefs.

Movebubble uses technology to disrupt an old, archaic industry, that of the private residential property lettings market. It does not enable people to share assets in a manner as that described above; instead it facilitates collaboration on key tasks centered on the long-term property rental process. Users are able to work together through technology to reduce the waste of a particular resource; time spent on a task. Through guided collaboration of tasks, aptly timed to reduce delays and confusion, via any device users are able to increase productivity on the move, ultimately reducing the time spent on such tasks. And as the old adage goes, “time is money”.

Such platforms will reduce waste, as user groups work together to achieve common goals, which in the case of Movebubble is a safe and secure rental tenancy agreement. Is the next step in the evolution of the sharing economy the emergence of platforms enabling users to reduce time spent on tasks, and to collaborate faster, remotely? Is this the rise of the Collaborative Customer?

In order for these Customer Collaborative Platforms (CCP) to work, users need to know that other users are validated, real and ultimately trustworthy. This is one thing that is held in common with the sharing economy. CCP’s must build a trusting community that is exclusive and not available to those who are not a part of it. The reciprocal nature of the review system requires that only those involved with transactions with another user are able to offer reviews and feedback. Not only do users need to trust the users of the platform, but they must also trust the platform itself. Data privacy is paramount, and CCP businesses must continue to invest in its security. It can take many years to build up trust in a brand, and unfortunately only a moment to destroy it. Executives of such businesses must work tirelessly to uphold and reinforce the messages that are central to such organizations: openness, honesty and transparency. Trust is the marketing currency of the future, with a vast number of Internet users still concerned about online privacy protection.

Consumers are primarily concerned with Environmental Control, i.e. the ability of the user to control the actions of the vendor (this could manifest as worries over supplying credit card information online) and the secondary use of that information (which is typically a worry that vendors will sell private information to 3rd parties). Although an older study, the 1997 Georgia Tech Graphics, Visualization and Usability Centers’ GVU 7th User Survey showed a whopping 87% of web users think they should have complete control over the demographic information websites capture, and over 71% feel there should be new laws to protect their privacy online. 63% of those reporting that they decline to provide information to websites have done so because they do not trust those collecting the data.

So that these businesses are able to ensure that customers can collaborate quickly and effectively these CCPs will tread the peripheries of public and legal interpretations of privacy. Such companies will need to pre-empt competitor actions with appropriate responses to calls for additional regulation on this subject. However, more importantly these CCPs will need to deliver an explicit social contract with the user, executed in the context of a cooperative relationship built on trust.

Any technology that can equip customers with the ability to undercut the current status quo through collaboration will ultimately win, as mainstream market adoption occurs via word of mouth (or word of mouse!). So get ready, as the rise of the collaborative customer is finally here.

 

 

 

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Google Glass – Is this an exciting new project or something more sinister? I am going for the first option…

Well, Google certainly know how to develop game changers. Last April Google released a video showing off its new project, Google Glasses. It was pretty cool, but it did only really seem to be a phone screen for your eyes. But Google have just launched a new video, and i think have rebranded the concept as Google Glass.

The new video, as you expect does look great, tugging on the heartstrings with ideas of sharing and family. But lets really talk… This as a fundamental shift in how we are going to view, access and use information. It won’t be long until this is the form of contact lenses, and therefore seamlessly integrated into the Neo-Humanoid of the future. Kevin Kelly founding executive editor of Wired magazine and a former editor/publisher of the Whole Earth Catalog certainly thinks that this transgression to instant access is inevitable. And as he says,

“if you dont like it go and live in the woods”.

Make sure you check out his site here, as he is a true hero of mine.

http://www.kk.org/

Its odd as i totally agree with Kevin Kelly, this is inevitable. We are going to move to an information access age, where technology, education, and sharing are something the whole world is involved in. But is there a dark side to this aswel? In order for the Google Glass Project to make your day better than yesterday, it has to record your vision. Mmm. What if there is a crime, and the police need access to your field of the vision for the day. Do we all become walking CCTV cameras? Well, yes we do. But i suppose we need to stop being so individualistic and selfish, and think about the idea of forced evolution. Although i abhor the concept of collectivism as a means to socially and economically evolve (i am a true liberal and believer in Hayek) i think that the dissemination of information to the masses is only good for freedom, trade and human development. This growth of the single brain, synthetic telepathy and instant access to all of human knowledge is going to happen to one way or another. And, so long as the governments do not own this, and it is run privately through the markets then we are, as consumers, still in charge. Who knows, but its certainly going to be exciting. There is an old Chinese insult, that translates to

“May you live in interesting times”

Well… that we do.

Here is the new video about Google Glass

Here is the original video posted about Google Glasses

@Billgates talking about the future of Energy

Bill Gates is a good guy. Lets be honest. He is one the wealthiest people in the world, a true philanthropist and he has founded the Bill and Melinda Gates Foundation which believes all life on earth has equal right to equal opportunity and is dedicated to achieving this. They believe in optimism, rigour, innovation and collaboration to get there. Make sure you check out their website by clicking the link.

Bill understands that reducing the cost of energy and the carbon constraint is important for the development of the human race, and in particular this will assist in pulling the poorest in the world out of poverty. He pontificates we need to move towards near zero carbon emissions and suggests that we require one of five pariahs within the energy sector to materialise. He talks of carbon capture, batteries, alternative energy sources, fourth generation nuclear power plants, investment into renewables, good economics and innovation to get where we need to go.

Interestingly i was reading an article called Marketing Myopia by Theodore Levitt within the Harvard Business Review. He talks of dying industries, such as the Railroads, as they limited themselves by not understanding they were there to add value to customers. In it, he states that the ‘Oil’ businesses are in for a rough road, unless they expand their views to understand what they really give customers. I dont buy gas for my car, i buy the right to travel another 100 miles. Should these ‘Oil’ companies be focusing more on alternative sources of energy, becuase if they dont someone else will and then the ‘Oil’ industry might go the way of the railroad industry. Down.

I digress… watch video of Bill Gates to be inspired and hear about entrepreneurship in energy.

An assignment about the effects of crony capitalism, aka #cronyism, on economic growth.

Does crony capitalism promote economic growth? Ensure that your answer demonstrates a sound understanding of the literature and is illustrated by specific examples drawn from today’s political and economic situation of any country or countries of your choice.

This paper discusses Crony Capitalism (cronyism) and illustrates many outcomes from this form of economic governance. It compares the efficiencies and inefficiencies of cronyism, implies a difference between corruption and cronyism, and that cultural heritage influences economic practice.

Economic growth is seen as a long-term increasing capacity of a nation-state to supply increasingly diverse economic goods to its population. This is based on advanced technology and the advancement of institutional and ideological organisations (Kuznets, 1973). It is influenced by increases in productivity through technology and innovation, economies of scale, and growing populations (Ayres, 1998 and Ayres & Warr, date unknown).

Cronyism in its lightest form can be described as collusion between key market players, but can also describe the cosy, symbiotic relationships between big business and the state in Southeast Asia (White, 2004). Kang (2003) refers to successful cronyism as ‘grudging relationships’ between government and business elites, creating mutually hostage situations. It materialises through favouritism toward business groups with respect to legal permits, government grants, tax breaks, and access to capital loans. Morck et al (2011) describe it as “elite-capture”, where “business-families” attain sufficient control over an economy’s financial sector.

The neoclassical argument states any government intervention removes the market from equilibrium resulting in a less efficient economy. However, in instances where mutually hostage parties occur, cronyism can reduce transaction costs and minimise deadweight losses (Kang, 2003) therefore increasing productivity. South Korea is a high performance economy, and has only a few key actors (the state and Chaebol) in mutually hostage situations. The result is stability, as neither one side nor the other can dominate. Granovetter (1985) further argues that more stable personal relationships between economic actors and the ensuing trust, is more important in discouraging opportunism than formal institutions. Immutable stable laws and trading environments can lead to durable agreements that are a prerequisite of economic growth, and Kang (2003) infers it is more agreeable for foreign investment.

In contrast both the Philippines and Indonesia have not provided economic growth through cronyism. In the Philippines too many actors result in a lack of cohesion, increasing transaction costs and decreasing its economic performance. Kang (2003) refers to this as a “pendulum of corruption” between business and state. In the case of Indonesia, cronyism was centred on Suharto. Initially stable, Suharto’s regime experienced sustained and impressive growth and foreign investment surged into Indonesia. However, Suharto’s stifling self-interested regime controlled almost 60% equity in all domestic investment by 1980 (Kang, 2003). The business sector was never able to become independently powerful outside of Suharto, hence no mutual hostages, resulting in high levels of corruption and increased transaction costs.

 

 

 

 

 

Figure 1: This graph shows the levels of high technology exports plotted against time of Indonesia, Philippines and South Korea. Data was taken from data.worldbank.org.

Figure 1 illustrates varying levels of technological export of 3 crony-economies, and that different versions of cronyism can result in different levels of technological advancement. The less corrupt the form of cronyism, the higher the level of technological advancement, which is a key indicator of economic growth (Kuznets, 1973).

Hill (1995) pontificates that the key to minimising the resource costs is maximising the productivity of resource inputs, requiring both cooperation and investments in specialisation. Hill argues that if a government gets it ‘approximately’ right then confidence among economic players regarding property rights and contracts reduces transaction costs thereby increasing economic growth and specialisation. He further discusses how the cultural norms within a society can act as a large behavioural constraint and will determine how individuals interact in everyday situations.

 

 

 

 

Figure 2: This figure shows GDP per capita in US$ plotted against time of Japan, United Kingdom, South Korea, Indonesia and the Philippines. Data was taken from data.worldbank.org.

Figure 2 shows the relationship between GDP per capita (which can be taken as a factor of productivity) of various countries. Japan’s surge in productivity from 1975-1995 perhaps indicates how ‘Japan Inc’ got it ‘approximately right’ through this period with larger gains than the UK. However, this graph implies that cronyism was not effective for the Philippines and Indonesia from 1970 to present day.

In Japan MITI served as an architect for industrial policy, and coordinated efforts with the Bank of Japan and other agencies to promote economic growth. The central government facilitated and spearheaded Japan’s economic expansion and brought about a radical transformation of industrialisation (Johnson, 1982). MITI relied upon personal relationship building over expensive formal institutions, and would exclude transgressors from informal associations between government and business leaders (Murakami and Rohlen, 1992). Hill (1995) hypothesises that the economic growth seen by Japan until 1990 was not only due to cronyism but also to the societal factors prevalent in Japan at the time, based upon the Tokugawa Value System of cooperation. This collective ideal resulted in a competitive advantage of Japanese firms over Western firms and reduced transaction costs and risks of hold up, therefore promoting investment in specialisation. Japan should not be mistaken for a command economy but perhaps a ‘developmental government’ as coined by Johnson (1982).

 

 

 

 

 

Figure 3: This figure plots the GDP growth (annual %) of various countries; Japan, United Kingdom, United States, Indonesia, South Korea and the Philippines. Data was taken from data.worldbank.org.

Figure 3 highlights differences in annual % growth rates of GDP, and shows crony-economies have higher growth rates than typically ‘laissez-faire’ countries such as the UK and USA. It is worth noting that the more developed Japan has a lower growth rate than other crony-economies, perhaps indicating cronyism does not promote economic growth in today’s global markets. In contrast Keegan (1984) argues that ‘Japan Inc.’ actually increased its competiveness in global markets through joint public and private goals.

Morck et al, (2011) talks of “big push” industrialisation and implies that large family controlled businesses use “tunnelling” to coordinate investment as a central planner might. However he goes onto to assert that ‘elite-capture’ correlates with less efficient capital allocation, and economies with large family-banks are prone to ‘boom and bust’. He presents empirical evidence showing family controlled banking systems decrease both real per capita GDP growth and TFP growth.

Kang (2004) argues that cronyism develops in economies where legal and political institutions are not developed, and transaction costs of regulating contracts are excessive. In this instance it is cheaper to revert to cronyism.

In conclusion minimising transaction costs is a key component to economic growth and that in the right circumstances cronyism can offer this, as seen in Japan and South Korea. Corruption is more prevalent in regions with less established legal frameworks and cronyism fails to deliver sustained economic growth. Cronyism is also closely linked with family-banking systems, which result in inequality and increased barriers to entry thus decreasing the competitive nature of the economy. My interpretation of the data is that crony capitalism can, in circumstances promote economic growth, where collaborative ideals are upheld such as in Japan, and when few economic players exist, but that growth is not long-term. I also conclude that once economies move into today’s global markets and must become internationally competitive cronyism does not promote economic growth.

GLOSSARY

GDP – Growth Domestic Product

MITI – The Ministry of International Trade and Industry

TFP – Total Factor Productivity

BIBLIOGRAPHY

Ayres, R.U. (1998) Turning Point: an End to the Growth Paradigm. London: Earthscan Publications [online]., pp. 192-195.

Ayres, R.U. and Warr, B. (?) Two Paradigms of Production and Growth. [online]. Source incomplete.

Granovetter, M. (1985) Economic Action and Social Structure: The Problem of Embeddedness. The American Journal of Sociology [online]. 91, pp. 481-510.

Hill, C.W.L. (1995) National Structures, Transaction Cost Economising and Competitive Advantage: The Case of Japan. Organization Science [online]. 6 (1)

Johnson, C. (1982) MITI and the Japanese Miracle: The Growth of Industrial Policy. Stanford, Ca: Stanford University Press.

Kang, D. (2003) Transaction Costs and Crony Capitalism in East Asia. Ph.d. Comparative Politics [online]. 35 (4), pp. 439-458.

Kuznets, S. (1973) Modern Economic Growth: Findings and Reflections. The American Economic Review [online]. 63 (3), pp. 247-258.

Murakami, Y. and Rohlen, T.P. (1992) Social Exchange Aspects of the Japanese Political Economy: Culture, Efficiency, and Change. The Political Economy of Japan. Cultural and Social Dynamics, Stanford University Press [online].

Morck, R., Yavuz, D. and Yeung, B. (2011) Banking system control, capital allocation, and economy performance. Journal of Financial Economics 100[online]., pp. 264-283.

White, N.J. (2004) The Beginnings of Crony Capitalism: Business, Politics and Economic Development in Malaysia, c 1955-70. Cambridge University Press, Modern Asian Studies [online]. 38 (2), pp. 389-417.

A brief assignment on micro and macro economic drivers. Globalization and Technology.

What do you consider to be the principal micro- and macro-economic forces driving change in the global economy in recent years and, using specific examples, explain why and how these forces have made global corporate management more complex?

This essay will isolate two key factors that influence micro and macro economic policies and how they make corporate management more complex. Technology is a micro-driver and I will illustrate how this affects the competitiveness of a firm. Globalisation is a macro-driver and I will highlight how this makes global management more complex as it has both expansionary and diminutive affects on trade and economic growth.

Writing, printing, and electricity are historical examples of technological development, and recent additions include the internet, lasers, mass production and flexible manufacturing (Malecki, 2002).  Labour and capital have been the conventional inputs behind output expansion, but recent theoretical developments place innovation at the heart of microeconomic development (Helpman, 1998 & Grossman and Helpman, 1990). Porter goes on to argue that the competitive advantage of a firm arises from technology and the efficiency with which conventional inputs are utilised (Snowdon & Stonehouse, 2006). Porter explains that competitive advantage – developed within the framework of Porter’s Five Forces model (Porter, 2008) – is the fundamental factor attributing to microeconomic development, arising from strategies of innovation and development. For an overview see Appendix 1. Business strategy should focus on technological advances, and how this can further business efficiencies. Kodak was a victim of technological substitution, with the advent of digital technology and the rise of its competitor, Fujifilm (The Economist, 2012). Constant, exponential increases in technology require constant investment and management to maintain competitive advantage, thus making management more complex.

The Internet is arguably the most significant leading technology of recent era (Malecki, 2002), and creates complementary products that increase productivity (Helpman, 1998) but also competition by drastically reducing the marginal costs for production (Bakos & Brynjolfsson, 2000), thus market entry. The increase in e-commerce firms is an example, where barriers to entry are virtually zero. Managers must be sure to identify potential entrants and substitutive products early so as to plan effectively.

The need to use technology and innovate quickly is required to deal with the shifting paradigm of global competitiveness. Firms should gauge the affects technology has on the boundaries of both vertical and horizontal integration perhaps necessitating boundary redefinition to establish efficiency (Afuah, 2003). Understanding performance related affects of technology and in particular the Internet within organisations (Conner & Prahalad, 1996) is necessary. To assess the affect that technology has on the whole innovation chain, firms must note the effect technological change has on its suppliers (Brandenburger & Stuart, 1996). Firms should communicate with suppliers as businesses have become more inter-dependant, and collaboration via the value-chain should be considered. A strategist can gain a competitive edge for profits through the industry structure manifested through the elements of Porters’ Five Forces model (Porter, 2008), and utilise technology to achieve this.

Globalization enabling technologies include the Railroad, Steamship and the Telegraph. Open, free trade was characterised by Dennis Robertson (1940) as an “engine of growth” and globalizers have demonstrated higher growth rates (Bhagwati & Srinivasan, 2002). Since countries have shifted from inward to outward looking policies, we have seen an explosion in world trade. Bhagwati & Srinivasan (2002), argue that comparative advantage is key in explaining trade patterns and that freer trade should help in the reduction of poverty. Porter counters this argument suggesting the traditional trade theory based around land, labour and capital has limitations, because of the liquid capital market (Snowdon & Stonehouse, 2006). The international movement of large sums of money at the click of a ‘mouse’ has obvious implications for multi-nationals, as currency speculation can quickly alter trading environments and currency values, thus quickly changing costs of production and sale. Keniche Ohmae further alludes to the ‘Invisible Continent’ with visible, borderless and invisible worlds in our new economy, and that these new online businesses can acquire others to perpetuate growth without regulation by nation states. (Ohmae, 2000).

Porter stipulates that no longer the quantity of labour affects your competitiveness but rather the specialisation and quality of labour. Porter argues for the competitive advantage of nations by saying “National prosperity is strongly affected by competitiveness, which is the productivity with which a nation uses its human, capital, and natural resources” (Snowdon & Stonehouse, 2006). Krugman talks of a new economic geography, in which specialised clusters emerge within nation states (Krugman, 1994). Examples include financial sectors in London, technology clusters in Silicon Valley, and low-end apparel manufacture in China. Firms must understand location is a key component to their operations, and that varying the location of parts of the value chain may be more profitable. The iPod is assembled in many countries, before eventually being ‘made in china’. To ensure continual price competitiveness this complexity must be understood. Globalization has dramatically altered the volume of goods traded, due to such innovations as the ‘cargo container’, which has in turn led to vastly complex value chains.

There has been a tendency toward decentralisation around the world, and increased heterogeneity of preferences (Alesina, 2003). He implies that ethnic heterogeneity and even racial prejudice can interfere with the implementation of good growth enhancing policies. Therefore businesses must empathise with cultural norms in all countries in which the firm is to operate. Alesina goes onto articulate that bigger is not always better, and insinuates economic integration results in political disintegration. It is interesting to note current political debates in the Eurozone, aimed at increasing fiscal cohesion. Furthermore, Grossman & Helpman (1991) argue a link between trade intervention and long-run growth, thus suggesting globalization does not present the optimum. Krugman suggests that we require more global policy coordination to ensure long-term growth, such as with the Financial Transaction Tax (FTT). Firms must understand individual national policies and how these will affect trade and operations. If a firm’s objective is to maximize profit, then being ready to move operations based on national policies is vital.

It has been argued that globalisation has increased negative externalities, in particular environmental issues. However Porters’ competitive advantage model suggests that better resource productivity would offer an advantage of efficiency over competing firms, and that therefore increased globalisation might decrease pollution (Porter & Van der Linde, 1995). Companies should look at increased resource productivity as a method to make itself more competitive in the global market and thus decrease pollution, which adds complexity of externality management. Firms can measure their environmental impact, and use this as a ‘litmus test’ for production efficiency. Managers should promote an innovative working environment to further production efficiency. Utilising technological developments is one method of micro-economic change that affects macro-economies.

In conclusion, it can be seen that technology and globalization affect micro and macro-economies, and that both add to the complexity of corporate business management in a global world.

APPENDIX 1

Porters Five Forces Model

Diagram 1: This diagram illustrates the key components of Porter’s Five Forces Model (Maxi-Pedia, 2012).

Porter’s Five Forces Model is a framework for industry analysis and the development of competitive strategy created by Michael Porter in 1979. It is used to assess the potential profitability of a market, and thus the attractiveness for investment. The process is used by business strategists when looking at new potential markets and businesses and is used to gauge the expected returns on investment. It should be used to shape strategy to increase company competiveness.

An unattractive market place is one where these factors combine to decrease potential profitability, where it approaches pure competition. In these instances one can only expect normal profits.

This model is more concerned with microeconomics where the focus is more local to business, rather than macroeconomic factors.

BIBLIOGRAPHY

 Afuah, A. (2003) Redefining Firm Boundaries in the face of the Internet: Are firms really shrinking?. Academy of Management Review [online]. 28 (1), pp. 34-53.

Alesina, A. (2003) The size of Countries: Does it matter?. Journal of the European Economic Association [online]. 1 (2-3), pp. 301-316.

Bakos, Y. and Brynjolfsson, E. (2000) Bundling and Competition on the Internet. Marketing Science [online]. 19 (1)

Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management [online]. 17 (1), pp. 99-120.

Bhagwati, J. and Srinivasan, T.N. (2002) Trade and Poverty in the Poor Countries. The American Economic Review [online]. 92 (2), pp. 180-183.

Brandenburger, A.M. and Stuart, H.W. (1996) Value-based business strategy.Journal of Economics and Management Strategy [online]. 5, pp. 5-24.

Conor, K. and Prahalad, C.K. (1996) A resource-based theory of the firm: Knowledge versus opportunism. Organisation Science [online]. 7, pp. 477-492.

Grossman, G.M. and Helpman, E. (1990) Comparative Advantage and Long Run Growth.American Economic Review [online]. 80 (4), pp. 796-815.

Helpman, E. (1998) General Purpose Technologies and Economic Growth. [online].

Krugman, P. (1994) Complex Landscapes in Economic Geography. American Economic Review [online]. 84 (2), pp. 399-424.

Malecki, E.J. (2002) The Economic Geography of the Internet’s Infrastructure.Economic Geography [online]. 78 (4), pp. 399-424.

Maxi-Pedia (2012) Five Forces Model by Michael Porter. [online] Available from http://www.maxi-pedia.com/Five+Forces+model+by+Michael+Porter [Accessed 25 February 2012]

Ohmae, K. (2001) The Invisible Continent: Four Strategic Imperatives of the New Economy. : .

Porter, M.E. (1980) Competitive Strategy: Techniques for analysing industries and competitors. New York: Free Press [online].

Porter, M.E. (1995) Green and competitive: ending the stalemate. Harvard Business Review [online]. 73 (5)

Snowdon, B. and Stonehouse, G. (2006) Competitiveness in a globalised world: Michael Porter on the microeconomic foundations of the competiveness of nations, regions, and firms. Journal of International Business Studies [online]. 37 (2), pp. 163-175.

Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy. Harvard Business Review [online]. 86 (1), p. 78.

The Economist (2012) The last Kodak moment. [online] January pp. ?-? Available from : http://www.economist.com/node/21542796 [Accessed 14 February 2012]

Fight of the Century… Keynes vs Hayek Round 2..!

Well, i am not 100% sure this is the fight of the century, perhaps more the fight of all centuries. Another great take on the continuing battle between liberal Hayek economic theory and the Government intervention promoted by John Maynard Keynes.

This video has been put together by EconTalk‘s Russ Roberts and John Papola, and i strongly advise you get involved in the fantastic set of podcasts from Econtalk. check the website here http://www.econstories.tv.

Having balanced on the edge of the edge of a depression after the financial slump seen in 2008, there are still many questions being asked by economists and policy makers so as to speed up the recovery in many capitalist nations, as growth and employment are slow to recover than anticipated. Should we push for more fiscal stimulus, should spending be steered and from the top down or does prosperity come as green shoots from the bottom up?

Listen to this great rap video, to get a take on all these and more.

Another great talk from Paul Krugman on #Globalization

As i begin to write my fist assignments on Economic factors, both micro and macro, that are changing in this complex world i have stumbled across this great lecture from Professor Paul Krugman in October 2009, regarding the history and future of globalization. This was part of the Citigroup Foundation lecture at the Ford School of Public Policy and International Policy Centre.

In this video Krugman highlights that this is not a new phenomena, and walks us through the standard theory of comparative advantage and how this is perhaps not entirely relevant in todays world. He talks about a new Economic geography, including clustering and specialisation, and the demands that the complex value chain has on firms. He goes onto mention by products of globalization to include an integration of thought (ie all people thinking the same when faced with a crisis), and how perhaps globalisation needs policy coordination.

Have a listen to this, as i think it is well worth the hour and half.

 

 

The evolution of economic theory and practice up to 2007

Classical economics has been around since the 1700s, with the likes of Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill and Alfred Marshall (amongst many others). It simply states that the economy works through no other mechanism than self interest, and that Supply ‘creates’ demand (Say’s Law). It works along the basic principle that the market will always adjust to find the equilibrium point between supply and demand, and that there is a natural adjustment to full employment. It is a brutal mechanism, concerned only with the markets and has not affection for the human impact! If the market strays from the equilibrium then the simple answer is to sit back, and wait for the re-adjustment. There is little role for governments, other than to maintain the rules and keep the markets free (ie a very laissez-faire attitude). There are certain roles for governments, such as defence etc, but that a balanced budget should be maintained at all costs (ie after the government spend of WW1, taxes were hiked and spending was cut to redress the balance regardless of human consequence). The belief was that if unemployment was high it was because wages were too high and that people were pricing themselves out of the market and that if there was inflation it was due to too large a money supply, thus fiscal contraction was required to reduce the money base. Market failure was placed very much on the shoulders of the government, and being too involved.

The Fisher Equation 

MV = PT

M = money supply
V = velocity/number of times the money changes hands
P = price
T = number of transactions

Seeing as it was believed that V and T were fairly equal/constant, it could be deduced that there was a positive relationship between the money supply and price (or inflation). Thus an increase in the money supply was seen to increase inflation and vice versa. Then the Great Depression hit, and it all changed.

Keynesian Theory Economics

This was the theory developed by John Maynard Keynes, that took force in the 1950s after the Great Depression. This is concerned with the control of aggregate demand within an economy, and that government should act to control this.

AD = C + (I-S) + (G-T) + (X-M)

for a further breakdown of this please read the following (‘How the Great Depression lead to further spending and fiscal stimulus‘).

Keynes argued that through fiscal stimulus; to include government spending and regulation of taxes; an economy could overcome the usual market cycle of boom and bust and maintain a more regular balance of growth and prosperity. It was a system that was not based on full employment, and was aware that the markets more often than not sat in disequilibrium.

After WWII, it was believed that the only road was that of depression economics. This involved currency devaluations, nationalistic agendas, increased tarifs and taxes for foreign imports. But after WWII both Theodor White and Maynard Keynes offered something new. Fixing the US exchange rate to the Gold Standard of $35 per ounce of gold meant, allowed all other nations to peg their currency to the US dollar which in turn offered the stability markets so craved. The International Monetary Fund was established to manage the currency rate and act as market stabiliser and between 1947-1971 the world’s economic waters returned to calm.

During this period it could be said that mixed market economies existed, where there was a carefully managed relationship between public and private sectors that was tied together with a fixed currency exchange rate. However in the 1980’s the exchange rate was allowed to float due to inflexible markets, and so became a floating exchange rate system.

Through this period it was apparent that the Phillips Curve, a correlation between % inflation and unemployment, existed and so fiscal control was an easy way to control the economic machine. However, in the 1980’s Stagflation set in where both stagnation and high rates of inflation were seen. This gave rise to Monetarist Economics. Monetarism was closely linked to classical economics and was  concerned with the control and supply of money. It was believed that inflation was positively correlated with the money supply, and so to reduce inflation a government should choke the money ‘drip’. However Monetarism was concerned with ‘adaptive expectations’, ie that one could look back over years of behaviour and systematically adjust policies. It blamed government intervention for inflation (going back to Fishers Equation).

There was an evolution of this, called the New Classical Economics theory which did not believe one could predict the behaviour of the people, and instead looked at the ‘instinctive adaptation‘ of leaders and building up a wealth of knowledge. This meant that responses were instant and based on principles, and that systematic errors did not occur. There was a firm belief that government spending resulted in inflation, and was an advocate for reduced government and mass privatisation. It was also called the Rational School of Thought.

Keynesian Economics has had to evolve also, and so as to counteract the forces seen in stagflation, suggested that contracts were vital so as to commit people and businesses to certain rates for a period of time. It aimed at focussing on what policies can work for governments and why.

Supply Side Economics, does just that. It returns to Say’s Law regarding supply before demand and looks at providing incentives to get back into work, promoting hard work and risk/investment. However, i have an issue with this, as i believe demand becomes before supply, and that all incentives in the world can be offered but if there is no work, there are no jobs.

In general this debate has been raging for many years, and will continue to do so for many more as there appears to be no right answer or that the right solution has not been found yet. I have not gone into the recent 2008 collapse, but will aim to get something up soon.

How the Great Depression lead to further spending and fiscal stimulus

The Great Depression began with Black Tuesday, on the Oct 29th 1929 when Wall Street lost $14 in a single day! Unemployment reached 25% and GNP fell by 50% in a year!

It was the belief of classical economists that this departure from the equilibrium of supply and demand would soon change and return itself to the natural equilibrium of the markets. However, John Maynard Keynes, asked ‘how long would the market wait before it settled back into the equilibrium point?’, and therefore challenged the fundamentals of Classical Economics.

‘the difficulty lies, not in the new ideas, but in escaping from the old ones’ – Keynes

‘capitalism holds the belief that the wickedest men will do the wickedest things for the greatest good of everyone’ – Keynes

He challenged Say’s Law, and suggested that without demand there was no market, and that markets do fail. He was adamant that the consumer was more important than the supplier. He believed that the government was required to control ‘aggregate demand’. He believed:

AD = C + (I-S) + (G-T) + (X-M)

AD = aggregate demand
C = consumption
I = investment
S = savings
G = government spending
T = taxes
X = exports
M = imports

He believed that through fiscal stimulus, ie government spending one could achieve a higher rate of investment and thus aggregate demand. This in turn would drive consumption, which would drive up taxes etc. It was his argument that this fiscal stimulus should come through Government Bonds, bought from the idle savings capital so as to increase investment, that would drive AD etc.

The original argument from the classical economist was that if you borrow all the money from the private savings then there is no money for future investment. However, this was overcome by the Multiplier effect, devised by Richard Kahn.

The monetary Multiplier, measures how much the money supply (this is the total amount of assets in an economy, including less liquid deposits and investments) is affected by a change in the monetary base (this is the total of highly liquid assets, notably coins and paper notes, in an economy).

Therefore if the money Multiplier is 5, and the government spends 100M, then the money supply will be 5 x this, and there will be 500M of actual money spent in the economy, assuming a Marginal Propensity to Save (MPS) of 0.8. Thus, within about 6 months, the original loan of 100M is paid back and there has been an additional stimulus for the economy of 400M.

This can be calculated with:

Multiplier = 1 / (1-MPS)

There are several things which can change this Multiplier affect. These include people’s willingness to save money which will depend on interest rates, and people’s willingness to spend/invest. It will also need to consider foreign investments made with this stimulus, and how not all GNI is GDP (ie some firms will remove profits to their own domestic market place).

The Phillips Curve and its demise

What Is meant by the Phillips Curve and account for its breakdown in the 1970s. 

The Phillips Curve shows a correlation seen between 1861 and 1950 showing the relationship between % inflation and the rate of unemployment. It shows a negative correlation hyperbola between the two sets of results (ie in general as unemployment rate decreases the % inflation increases).

Definition: Inflation is a persistant tendency for prices to rise.

This was seen to support Keynesian Economics, and was a politicians ‘dream’ scenario as it demonstrated that government intervention through fiscal policy could control inflation. For example through positive fiscal measures (ie reduction in taxes and increased government spending) then unemployment fell, but inflation increased. As the economy ‘heated up’, they could choke off the fiscal stimulis, and this would reduce inflation by increasing unemployment.

This relationship worked very well up until the 1970’s, when stagflation set in. Stagflation was a combination of both stagnation and high inflation and gave way to Monetarism.

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