Growing in commoditised markets

Do you have a set way of thinking about innovation in business? These days, governments are heavily involved in funding research and development in a bid to help their economies lead the way in one area or two. These are all good except when people come to think of it as a one-size-fit all approach to business problems.

When a product or market becomes commoditised and competition reduces pricing power, the prescription tends to be about differentiation and “innovation”. The nature of the product or service is important to consider what kind of innovation there can be. A lot of commoditised businesses are simply cash cows: mature and cashflow generating but not growing.

The optimal way to grow with less risk is not to try and change the product. It is to consider consolidating the market slowly and one at a time. Find niches to acquire and gain scale, focus on optimising costs to enhance profitability and then use that to make more acquisitions. This is basically what is known as “roll-up” strategy commonly practised by private equity firms.

This sort of innovation is less visible but more profitable and meaningful for those companies. Maybe you won’t be poster child for being a company who went through “transformation”, but that’s okay!

Opportunity Cost & rise of FOMO

I wrote about opportunity cost and it dawned on me that I need to improve upon the story. Not just about the opportunities forgone but also the opportunity set. Implicit in the economics concept of opportunity cost is that you’re only have to consider the best alternative, just one.

But in this age of almost infinite choice, what is the best choice? Not to mention the best alternative. In trying to consider the choice and to “price” it against the alternative, our brains often just decides to be lazy and ask what everyone else does instead. There is less independent thinking, evaluation and decision-making.

To certain extent it is our cognitive abilities being overwhelmed but it is also us being lazy. The danger of following the crowd is that we then become afraid of missing out, which causes us to consider even more things, and lose even more bandwidth.

So the way to think about opportunity costs, might be to consider the set of opportunity that exists as alternative, and see roughly that “alright, those are what I’ve decided to miss out for this – more as an objective statement to oneself”. That is your subjective valuation of the choice you made.

Disagreements

How do you draw up an “agreement”; more often you should not really be thinking of what you agree on to include. Because the agreement is not really used again until you disagree. So better to think about what you’d likely disagree on later as a way to approach the drafting of an agreement. Ironic, isn’t it.

Dwelling on disagreements is an unlikely formula for harmony but I would say it is not disagreements which results in disharmony but what we do about disagreements in general. And that is where the education system comes in again.

The modern education system is there with an immense amount of nobility but also vested interest. Mass education lifts people out of poverty by enhancing their opportunities but they are also there to train people to become employees, to follow instructions, be obedient, conform. The industries want workers and reward them for having gone through those comformance training. And the cycle continues.

And that is probably why they don’t teach you much on how to disagree. Yet all the more it is important because these skills are scarce – disagreeing in a way that is agreeable. Disagree but yet be able to influence others to your side. Disagree and make a case with passion but no offense, with just joy and conviction the others want to join your side.

Opportunity Cost

The concept of opportunity cost is probably not so well appreciated even though it is extremely simple. But the manner by which we tell the story of opportunity cost might have to change in order for us to appreciate this powerful concept.

We traditionally understand opportunity cost to be the sacrifice of the next best alternative in whatever choices made. The best example is the way you spend your time; when you choose to spend your time going through facebook or your instagram feed, the opportunity cost is the work you could have done, or the presence you could give to your family. Likewise, money spent on consumption cannot be saved.

Time and money is scarce. But when we tell our story about opportunity cost, we tend to focus on the cost in terms of what is scarce. Sure, it is the limited time and money (as a proxy for resources one has) that results in the existence of opportunity costs, but what we are truly sacrificing is the “opportunity”.

So it is important that we begin to think about the cost of one thing or another not so much in the form of time and money but what that time or money would be used otherwise. Because without the “opportunity”, the cost has very little meaning.

Profits and surpluses

When companies earn more than they spend, they make a profit. And this profit, reinvested in the right places, turns up more. And the cycle continues. But not to build up profits; rather, there is a larger goal from the cycle. The larger goal is about serving people, bringing goods and services to those who have not yet accessed it.

What this means is that you can return profits to shareholder, or you can expand the business to serve more, ensuring of course that it does not come at the expense of perpetuating that profit cycle.

How about an individual? When we earn more than we spend (which we should in at least a significant part of our lives), we end up with savings. Likewise, how this is reinvested matters because it helps determine that very same cycle. The question for an individual then, is what is the larger goal he or she is trying to achieve.

It could be more consumption of course. So then the business analogy ends here.

Or does it? A business can be self-serving in that it spends on a posh office, lots of perks for executives who only shuffles paper around. Overly indulgent, unproductive consumption might not be too different. We want to be able to invest our surplus in changing our lives and those around us; part of it will enable more consumption but a lot of it are going to be gains from a better culture, opportunities to engage in higher levels of cognition, problem-solving, and creativity.

Being critical

Should a teacher who is critical of the education system he or she works within, encourage and foster that in the students?

It is inevitable that a teacher brings to the classroom his or her own biases and influence the students. Yet for some reasons, with the modern institutions and bureacracy, there seems to be this illusion that things can be standardised. And so teaching can somehow also be standardised – which belittles both the teachers and students alike.

And we think that through all that standardisation, the system can take responsibility of the students more than the teachers. So instead of driving accountability, there’s more interest in creating policies, putting rules and processes in place for just about everything.

The end loss to students probably is not quantifiable. The least we can do, maybe, is to ensure the students are aware of the limitations.

Deep strength

When we were young and playing in the playground, strength was being able to go on the monkey bars and do the full length of it. Then we went to school, where being strong meant good academic results, taking on leadership roles, and being active in sports.

In army, strength was the push-ups and pull-ups you could do, and how short was the time you took to run 2.4km. At work, it was enduring long hours and delivering a good piece of work even under pressure, competing demands.

As you grow further, you take on greater responsibilities, face more uncertainties and confront challenges like death of friends, family. Having to deal with financial burden of caring for the sick, continuing to love your children even as they rebel or resist your care, dealing with crushing deadlines as you disappoint your loved ones with your absence. That becomes strength.

And when you age, when you receive that diagnosis of a terminal illness, you soldier on; trying the different treatments, hanging on to your faith; encouraging your family with your humour. That, is deep strength. Strength which you know that kid in the playground who just did a full length of monkey bar will still take a lifetime to cultivate.

“My grace is sufficient for you, for My strength is made perfect in weakness.” … Therefore I take pleasure in infirmities, in reproaches, in needs, in persecutions, in distresses, for Christ’s sake. For when I am weak, then I am strong.”

2 Corinthians 12:9a, 10, NKJV

Real strength that God grants us, is the strength for life. It is the strength that defeats death; that comes from a hope unseen.

Idea of ecosystem

The ecosystem is a brilliant analogy for an industry. And that is where we need to recognise that everyone within the market are basically winners – not all of them win the same way just as not every specie or creature survive the same way in the economy.

You need small businesses and large ones; at any one time there will be some facing lots of survival pressures and others enjoying their spoils. There is nothing wrong with either and one cannot conclude much from a single snapshot. At the same time, it is really hard to tell what can be a winning strategy because success, like failure, is often temporary as long as it is not terminal.

Well people tend to think failure is the one that can be terminal but one needs then to develop good strategies for failing so they are not terminal but almost instructive. And as with natural ecosystems, a healthy industry has its births and deaths. Capital and talent needs to be churned around and get to experience different things in order for the overall industry to grow stronger.

We need to appreciate this different story about market capitalism that is less vicious, less about active competition, more about coping with environments and contexts. Less about winning individual battles but more about staying in the game to continue participating. That itself, is a win.

Sustainability goals

So the post on incentives was probably an economics post disguised as a sustainability post. But honestly, it is difficult to get economics out of our daily lives. Even when I talk about career choices, I inadvertently try to perform some kind of cost-benefit analysis on it.

What is bad about economics as it is applied, is that a lot of intangibles or non-measurables get ignored. Yet that is just improper application of economics. The principles behind economics still allows us to make evaluations (in our very subjective human way) on the intangibles and urges us to account for all that.

For example, we can value the environment more than convenience when we bring our own bags, take the trouble to recycle stuff. The action reflects our subjective valuation even if we cannot put a price on it. And precisely because our valuation can change due to specific context, circumstances, psychological priming, that it is going to require a lot of that to make sure we tip the balance in favour of environment and align all the incentives. Not just monetary, but social, and psychological.

In other words, we focus more on our goals of achieving sustainability, having established at a higher level that it is worthwhile. Then we generate the incentive structures for every individual so that habits, actions and all gear towards that goal. Easier said than done.

High school never ends

Was introduced to this song by Bowling for Soup, a pop rock band popular in the 2000s and still active now. Ignoring the bits of somewhat vulgar lyrics, the song is profound in its critique of the superficial, materialistic world.

The essence of the song is that humans care about status roles. It is so primal and it affects us in all kinds of ways in the modern world. We care about who is popular, who we associating with, what we own, use and have – not necessarily because we want them. But because of what people are thinking about us when they see all that.

Are we sure we want a world where it’s just us? Where no objective, true view of each and everyone of us exist?