Digital Musings

A random walk down Wall Street...

Princeton University (and author of best-selling author of A Random Walk down Wall Street) Burton Malkiel was in Paris where he gave a speech on investments, stocks, bonds and asset allocation. Burton is more than ever an advocate of the efficiency of financial markets. He gave a word of caution though: He said that we have entered a world of single-digit rates. In other words, the good old days are behind us and investors should not expect an equity risk premium as fat as it used to be, as fat as MBA students are usually taught. There are a host of reasons why stocks may no longer outperform bonds the way they used to. We'll go over them in a later post. In the meantime I urge you to read Burton Malkiel's latest edition of the Random Walk. This is genuine Malkiel, informative, well-taken and fun to read!
Don't worry though, stocks are still good to your health!!!

Attitude beats latitude! Part III

Part I and II look at the challenging question of prosperity and poverty. The risk imbalance between wealthy and poor countires is a likely culprit that acts like a Damocles sword on poor countries. So, the key question is to reduce this imbalance, how to make sure that poor countries do not always end up managing by.

Creativity can defeat the risk-sharing divide. As Michael Mandel, Business Week's chief economist, puts it “ the invention of new markets – whether physical or financial – is one of the highest forms of economic creativity.” Here one can talk about Financial Entrepreneurship. Why such entrepreneurship is somehow neglected by academics and why the public accept Gates getting billions, but is offended when financial entrepreneurs such as Milken, get 1 billion is still an obstacle to overcome.

Making an innovation successful is not an easy task. There is some kind of alignment of planets going on there. Hence the potential for failure is not nil even for a bright idea whose time has come. The late Mancur Olson (1982, 2000), Distinguished Professor of Economics at the University of Maryland, reminds us that our democratic societies suffer from the growing proliferation of interest groups whose sole agenda is to defend their own “pré carré”. The reduction of the risk-sharing divide carries a lot of benefits. However, people won’t buy it even if its intellectual foundations are elegant and convincing. It takes charismatic leaders of opinion to create the public debate, to foster the public interest. It took Hernando De Soto and his stubborn crusade to make the “dead capital” message listened to. It took Muhammad Yunus to make the Grameen Bank and its followers what they are. There is no reason why the same path should not apply to the reduction of the risk-sharing divide. But there is more than charisma to the equation.

Charisma is the form. What about content? Poor and less developed countries are plagued by closeness. As a result, most of the issues are discussed or thought of along ideological lines (Brenner (2002)). These ideologies are often the antechamber to wars and riots. And, unfortunately, when academics, commentators do not know any facts – often the case – they substitute with jargon and ideology. In such circumstances, people are steered towards more government support or even towards criminal activities.

Government support usually comes from outside (Yali’s cargo), directly from government of wealthy countries or indirectly through NGOs. But, this simply does not work: People are still denied to decide upon the challenges they want to embrace. This is why the western countries should condition the access to their capital to the opening up of financial markets. This is where Brenner advocates a bottom-up approach. But again, the devil lies in the details. First, the opening up of a financial market is no warranty of its future
success. Not all “buttonwood tree markets” turn one day into New York Stock Exchange! (Blume, Siegel and Rottenberg (1993)).

As a matter of fact, a lot of small financial markets have a hard time breaking the initial “chicken and
the egg” dilemma: Financial markets attract investors if they offer depth; but to have depth they need investors. That is where again financial engineering may help a lot. For Western investors emerging financial markets offer new diversification opportunities. Indeed, they span risks that the current financial markets in which these investors are invested do not span. For local investors, they bring ready-made depth and diversification. They get access to claims that would otherwise be inaccessible. This should induce them to invest in their newly established local financial markets with more confidence.

Second, there is the more subjective issue of the political willingness of getting things done. Things can be done, but they rarely fit local political agendas. This is precisely why a bottom-up approach is far better than a top-down approach. In the latter (the usual (IMF-World Bank) way) local elites still have the upper hand on things. And, it is quite obvious that they won’t happily create a new context that is deemed to boomerang on them. French philosopher Pascal Bruckner has a nice way of summarising the issue:

“ Cosmopolitans bring out something essential, upset opinions, bare the lie of closed societies”.

Financial markets are part of the cosmopolitan tribe. They make local governments accountable. If they fool around for too long, they will be punished. This is the litmus test of the willingness to promote openness
versus closeness. David Brin, a famous science fiction author, has his own very personal way to describe openness:

“Because I'm a brash eccentric, I need a society that is open, tolerant and welcoming of eccentricity! One whose institutions are accountable enough to minimize the inevitable capricious power abuses that fester in every human culture. One where competition takes place under conditions that maximize fair comparison of quality (in goods, services, and ideas) while minimizing the destructive effects of our most loathsome human trait -- an ingenious talent for rationalizing, predation, cheating and oppression.”

He goes on and advocate “a world where coercion is minimized and individuals are free to achieve the maximum they can by making fair and open deals with each other, leveraging off others' talents, and benefiting from the mutual criticism that only true freedom engenders.” This is not science fiction indeed. And, we better listen to him. Openness is what financial markets are made of. Openness is what people need. But we need more. We need accountable eccentricity in all senses of the expression.

Financial markets embedded in a proper maze of checks and balances yield this essential accountable eccentricity. We have to take the risk-sharing divide seriously. The divide is a biting reflection of our inconsistencies, of our procrastination and last bust not least of our shady deals. It is not the reflection of some geographic curse, of some meteorological blessing or of the proximity or farness of large markets or trading trails as some economic growth theorists would like us to believe.

Otherwise, how would you account for the high per capita income of seventeenth century Low Countries, eighteen century Scotland or modern Iceland (for more on this see Brenner (1997)? Who would have thought that Japan would outperform Argentina by such a fat margin? Latitude and longitude do not matter as long as governments are themselves open and eccentric-minded. Hence, the divide does not have to be so.

The divide is not only between poor and rich countries. The divide gnaws rich countries too. Being poor, being exposed to a game of chance is not a fatality. Poor people, poor regions, poor countries have the same vitality as rich ones. The only difference is that it lies dormant. Proper (open, eccentric and accountable) risk sharing is the key to wake it up.

Attitude beats latitude! Part II

In Part I we walked down "Prosperity Street" and emphasized the risk imbalance between rich and poor countries. Let us call this situation “ the risk-sharing divide”. De Soto is right. Capital in poor countries is dead, but he should have hastened to add, risks in poor countries are live and deadly. When you leave Cairo’s Nile Hilton, you leave behind not only legally enforceable property rights but also the whole risk management panoply (financial derivatives, (re)insurance etc…) And, even if capital were to be freed and rights to be legally enforceable, this would not do much if risks were still as deadly as before. Worse, a sharp decline in national income after the occurrence of some unexpected events may even jeopardize or destroy law enforcement efforts. Life in the poor countries is plagued by risks. Fafchamps and Lund (2000) summarize the issue in quite vivid terms:

“ The vagaries of health, weather, crop pests, and job opportunities create large income variations over time. In addition, households must incur large expenditures such as medical costs and funeral celebration, the timing of which is not always foreseeable. With per capita incomes low in even the best times, unmitigated income and consumption shocks can have devastating consequences.”

The contrast with developed countries is sharp.

People in rich countries have access to a wide set of investment options that allows them to insure against many of the aforementioned risks. They can invest in stocks, bonds, cash, mutual funds, options and futures. They can buy life and P/C insurance. They have access to pension plans. In other words, the
risk-return menu they can buy into is quite rich. Still, some argue that this not enough. Athanasoulis, Shiller and van Wincoop (1999) write:

“ there is good reason to believe that most people’s wealth is not well diversified.” They, for instance, claim that although investors can diversify through equity markets (10% of national income), “ about 90% of an average person’s income is sensitive to sectoral, occupational and geographic uncertainty”.

Hess and Shin (2001) make the same point. They find based on consumption risk sharing regressions that the level of aggregate intra-national risk sharing in the United States is still too low. Somehow US households invest in “ the familiar” which does not lead to a sufficient level of aggregate risk sharing. It may help them get rid of some idiosyncratic risk but does not help on a broader risk scale. It is true that the fate of too many individuals and their standards of living are driven by chance.

Nevertheless, people in rich countries are much better off than their poor countries fellow counterparts since they have access to a richer set of risk sharing institutions and have the ability to enforce the rights attached to their risk-sharing claims. People and businesses in poor or developing countries are plagued by risks that they cannot efficiently share or transfer. In such a hostile environment, people and businesses that are always tangent to the survival level focus more on staying alive, getting by than getting ahead. The fundamental problem today is that this risk-sharing divide between poorer and richer countries is growing bigger and bigger.

Poor countries citizen are shunted around from good luck to bad luck and from fortune to misfortune – to even more misfortune.

This is sad for people. Despite their local efforts, their lives and businesses are still driven by chance. It would be an unfair description of reality, though, to assume that people in poor countries are simply victims of their countries’ latitude. The fact is that poor people are kept hostages of their own countries, not by latitude but by the very attitude of their governments. Closeness and self-interest often prevail. Governments are not held accountable. People are denied any rights whatsoever. Or, to have them
enforced, they have to go through so many red tape ambushes that they soon give up or hit the road. Yet, the arithmetic of prosperity is awfully simple. McGill University Professor of Economics Reuven Brenner (2002) extends De Soto’s point in his recent book “The Force of Finance”.

To prosper people must have access to capital. Talent must be matched with capital and the two sides of this wealth enhancing equation have to be held accountable.

There are only five ways to source capital: Natural resources, savings, capital markets, government and crime. The last two ones are somehow what’s left when the first three ones are unavailable. This is what we see in many poor countries: government and crime at their worst more often than not. Having a sound access to proper capital is not an easy thing. It is a complex and subtle construction that can be easily perverted. It requires a rich set of markets and institutions to channel funds and risks properly. It also necessitates a maze of checks and balances – both private and public – to make sure that mistakes are recognized and corrected with no delay. In other words, it takes an open-minded attitude and some hard work to get there.

Attitude beats latitude!: Defeating the risk-sharing divide - Part 1

Growth and wealth are the two sides of the same Holy Coin. Like its medieval counterpart the Holy Grail, the Holy Coin is not easy neither to locate nor to grasp. A meticulous and uncertain quest is the only way to the next clue. Indeed, shrewd knights (read economists (Solow (1956), Romer (1986) Jones (1998), Brenner (2002)), historians ((Braudel (1979), Baechler (1995), Favier (1987), Landes (1998)), social scientists (Weber (1947)) have embarked into a far-reaching crusade to undertand why some countries grow (grew) rich while others remain(ed) or became poor. In his address to the 1989 American Economic Association Meeting, Harvard historian, David S. Landes, chose the following title: “Why are we so rich and they so poor?” Adam Smith was looking for the same Holy Coin in his famous 1776 treaty “An Inquiry into the Nature and Causes of the Wealth of Nations”. For all its repeated efforts, this intellectual Round Table has not really succeeded in its quest. Although our understanding of economic miracles and curses has improved much is still left to discover.

In an insightful book, University of California Medical School Professor of Physiology, Jared Diamond (1998), has a colourful way of summarising the situation. In July 1972, he was studying bird evolution in New Guinea. When walking on the beach, he met a local politician named Yali. Yali was characterised by an insatiable curiosity. At some point, Yali asked Diamond a question that had been burning his lips for a while:

“Why is that you white people developed so much cargo and brought it to New Guinea, but we black people had little cargo of our own?” (Cargo refers to the goods (steel axes, matches, clothing, umbrellas etc…) that were brought to New Guinea by planes. For New Guinea people these planes looked like Holy Planes! See also Brenner (2002) for an account of the so-called “cargo cult”)

Same coin again, same tough question. These days Yali’s question is even more vocal. From Genoa to Porto Allegre, a growing crowd of people is angry and worried. It voices its concerns about globalisation and the so-called increasing growth-wealth divide between the riche and poor. It agrees to disagree with the world that is supposedly being shaped by the Davos Forum and its members. The divide is deep and more and more binary.

This brings us back to the Holy Coin quest. According to traditional growth theory à la Solow, we are richer because we invest more and have lower population growth rates. Hence, we accumulate more capital per worker and we increase labour productivity. Moreover, technological progress makes this growth in wealth sustainable. We spend more time learning and acquiring new technologies. So far, so good. But how is it that this simple recipe does not apply everywhere from West to East, North to South? The Holy Coin strikes back. One answer is institutions. The recipe assumes that the conditions – equality before laws, for example - to reap all the rewards are in place. Well, anyone who has run a business in a country like Peru knows that this is a rather bold assumption to make. The rights of minority shareholders–foreigners in particular – are a non-existent notion in most countries around the world. No wonder not much capital flows to such countries. Sometimes,the reverse is true: too much “hot money” flows to these countries. Indeed, the safety net deployed by the IMF induces many investors to leap before looking. Even just having simple property rights defined and enforced is an oddity in many places around the world.

Peruvian economist Hernando De Soto is inexhaustible on the latter issue. His argument is far from rhetorical. In his 1989 book “The Other Path”, he conducted with his team a hands-on experience to estimate the impediments (complying with local regulations, processing red tape…) brought up by the lack of proper infrastructure in his native Peru. To do so, he started a small garment factory in the outskirts of Lima. The nightmare went live: He and his team estimated the cost inflicted on their small operation to roughly thirty-two times the monthly minimum living wage. So much for legal and enforcement infrastructure.

In another illuminating book “The Mystery of Capital” De Soto pushed the argument even further:

“ This 80% majority is not, as Westerners often imagine, desperately impoverished. In spite of their
obvious poverty, even those who live under the most grossly unequal regimes possess far more than anybody has ever understood. What they possess, however, is not represented in such a way as to produce additional value.”

De Soto highlights the case of Egypt. He argues that when you leave Cairo’s Nile Hilton, what you leave behind is not fax machines, television, air-conditioning or antibiotics. What you really leave behind is “ the world of legally enforceable transactions on property rights”. You are drawn form a formal world to an informal one. This is quite a quantum leap: A leap from the live to the dead. Indeed, assets do exist but “ nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts etc…” According to De Soto, capital is dead. It cannot be used as, say, a collateral to create value.

This sad state of affairs begs an obvious question: Why is that? How come the curse of dead capital is affecting some countries so vividly? The answer is less obvious. It is true that, absent legal and enforcement infrastructure, a major piece of the growth engine is missing. Without these institutions, poverty cannot be eradicated. People will get by. But they won’t be able to thrive. However, it is not the only missing piece. A related one – interconnected with the former - is the lack of risk-sharing opportunities. One cannot design securities and/or institutions to share risks, when property rights are not well defined and when their enforcement is not guaranteed when needed.

Sumantra Ghoshal

Management literature is mourning one of its gurus. Sumantra Ghoshal, Robert P. Bauman Chair in Strategic Leadership at the London Business School and founding Dean of the Indian School of Business in Hyderabad, passed away suddenly last week at the age of 55.

A graduate of MIT and Harvard, Sumantra Ghoshal was an influential management thinker and a prolific writer. His publications include: Managing Across Borders: The Transnational Solution, Transnational Management: Text, Cases And Readings, Organization Theory And The Multinational Corporation, The Individualized Corporation, The Differentiated Network, and several others. In 1995, he published a series of three groundbreaking articles in the Harvard Business Review, all co-authored with Christopher Bartlett under the titles “Changing Role of Top Management” - Beyond Strategy to Purpose (1) - Beyond Structure to Processes (2) - Beyond Systems to People(3). These articles examined the most basic task of corporate leaders - to unleash the human spirit which makes initiative, creativity and entrepreneurship possible. His most recent book, Managing Radical Change, explores the key factors that influence an organization’s ability to achieve radical improvement and surf a rapidly changing business environment.

In a forthcoming post, we'll come back to Ghoshal's contributions pertaining to the issues raised by globalization.

2 + 2 = 8

What is the magic, if any, behind 2 + 2 = 8? Well, the story is that if you try make it happen it usually won't work. To put it in John Kay's words "goals are most likely to be achieved when pursued indirectly." Obliquity is the name for this. What does it tell us about businesses and the goals they shoud be pursuing?

The current fad is for businesses to concentrate on maximizing shareholders value. Metrics have been crafted that supposedly measure the failure of success in achieving this target. They are called EVA, CFROI etc... The theory behind it is that, other things being equal, focussing exclusively on shareholders captures every dimension of the corporation anyhow. But is it that simple? Is it carved in stone that this rational managerial framework outperforms a more holistic managerial approach.

John Kay has a nice metaphor to show that the devil lies in the details indeed, that of the US National Parks Service. One duty of this governmental body is to ensure that forests are not destroyed by their greatest enemy, namely fire. The stated goal of the Service was once that of zero tolerance towards fires. Every outbreak would be fought and extinguished. The resulting fire statistics turned out to be exactly the opposite of what was expected: More fires rather than less fires. Why? Because forests (like corporations) are a complex system. Indeed, allowing some small fires to burn is a good way for making sure that bigger fires won't have much combustible undergrowth left. Hence, instead of having forest rangers enforcing the zero fire target, letting them judge what to do depending on the current environment was a far better option. Rather than putting an optimization goal (that of a fire numbers minimized to zero) at the forefront, an adaptation (holistic) approach was in the end privileged.

The adaptative approach is especially relevant in an environment where small differences in the beginning can make big diffrences in the end. The common example that springs to mind is that of the butterfly whose flapping wings in Africa may trigger a storm weeks later in the Carribbean! Complex systems are typically non-linear and so has become the modern business world. Our modern societies have migrated from economies of perspiration to economies of inspirations. Does this make a hell of a diffrence? Yes it does! The economics of ideas is far more subtle and complex than the economics of hard assets. Indeed, ideas are very different from hard assets, they are non-rival: Your using the Pythagorean theorem does not preclude me of using it. Ideas are also partially excludable. For instance, a copyright or a patent gives you the right to charge for the use of your idea, or in case you can't to sue. The non-rivalrous feature of ideas gives them an atypical cost structure. Indeed, a good that is rivalrous must be manufactured each time it is sold. A non-rivalrous good, such as an idea, requires a significant fixed cost of production for the first unit and a very small marginal cost for the future units. Think of Microsoft's Windows. They charge you a lot for something that a "small" marginal cost. The only way to recoup the initial outlay is to deviate from competitive pricing (price=marginal cost), to charge above marginal cost and to create a rent. This is where increasing returns to scale kick in and where the winner may indeed take all: 2 + 2 = 8!

Question is then: How does this happen before you're dead? Santa Fe Institute W. Brian Arthur calls for an understanding of the differences between what he calls Alfred Marshall's world and the increasing returns world. Alfred Marshall, a leading British economist (1842-1924), lived in a world of bulk production, of perspiration and of diminishing returns, namely a world where the trend was towards "normal" profits in the equilibrium for all entrepreneurs. As Marshall showed in his Principles of Economics , optimization tools are prime candidates to get a concise picture of such a world. The increasing-returns world is a significant departure from Marshall's world. This is a world were things tend to wander off, where things that get ahead, get further ahead, where things that get down, get further down. A popular example of this in the Internet is network effects. The outcome of such a world are now well-documented: Imperfect competition, chaotic marketplace, unpredictability, lock-in, winner take-all and..... "fat profits for the winner (2 + 2 = 8)".

How do people, corporations behave in such a world? Should they optimize à la Marshall, strive for the maximization of some metrics such as EVA or rather shoot for more holistic approaches à la forest rangers? Well, it seems to me that the best option you can go for in a complex world (which is a mixture of Marshall's and increasing returns') is to develop a strong sense of adaptation. Physicist Murray Gell-Mann, author of The Quark and The Jaguar writes "whether putting together a business plan for a new venture, refining a recipe, or learning a language, you are behaving as a complex adaptative system." After all, when you look at earthquake or floods, rather complex phenomena indeed, it is hard to predict them but easy to avoid building your house in an earthquake or flood prone area.

The increasing returns world is truly a world of obliquity, psychology, perspiration and inspiration, cognition and adaptation. Economists do not say otherwise when they say that the economics of ideas call for a move away from perfect competition.

To make hits happen, to reach the 2 + 2 = 8 arithmetic, single metrics such as EVA, CFROI, whatever their sexiness, won't do. Worse, they'll more often than not push you in the wrong direction and defeat the whole purpose you had in mind in the first place. Complexity calls for humility. Catch-all single metrics are simply too arrogant!

That's why, as you can imagine, I keep wondering what is going to make this blog a real hit!

Warren Buffett, PepsiCo and Kendall the $1bn Chimp

Last Saturday Warren Buffett, the Sage from Omaha, delivered his Annual Letter to Bershire Hathaway shareholders. What is so special about it? Tens of thousands of companies are operating around the world. Each one produces an annual report with a letter to shareholders to give investors an account of how their corporation performed in the previous year and what is in the pipe for the forthcoming year.

Of all those letters, the one that excites the most interest is indeed the annual missive from the Sage of Omaha, Warren Buffett, whose iconoclastic approach to running a company has made Berkshire Hathaway Inc.'s class A shares the most expensive stock in America. The 2003 Letter is pure Buffett. No need to say that Buffett is still disappointed with Corporate America: "In judging whether Corporate America is serious about reforming itself, CEO pays remains the acid test. To date, the results are not encouraging." In a coming post we'll cover Buffett's criticisms and suggestions for an improved corporate governance.

For the moment being, we'll look at a thought provoking piece of business information related to the insurance side of Bershire Hathaway. Buffett tells his shareholders that Ajit Jain, who runs Berkshire reinsurance operations, had decided to write a rather unsual insurance policy. Indeed, in 2003 PepsiCo promoted a drawing that offered participants a chance to win a $1 billion prize. The drawing was to be made by a chimp named Kendall. Pepsi management was obviously worried that somebody might hit the jackpot. Hence, it decided to find somebody to lay off the risk. And, guess what, Berkshire issued a policy for the whole risk (as a matter of fact, the risk was less than $1 billion as the prize was to be paid over yearly instalments, namely a present value of $250 million). The drawing was held on September 14th, 2003 and you can imagine that Jain and Buffett were holding their breadth while Kendall the chimp was carrying its duty. Fortunately for Berkshire, nobody won!

This story is not only interesting per se but also because it raises the question of whether you can trade away any type of risks. Kenneth Arrow and Gérard Debreu, two Economics Nobel laureates, came up with the so-called complete markets model where any event can be spanned by a security yielding a payoff upon the occurrence of the event and none in case of no-occurrence. The model is also nicknamed the Arrow-Debreu model. Real life is obviously far from this abstraction. But, as Buffet's example shows, market creativity reduces the gap between the ideal Arrow-Debreu world and reality.

This reminds me of the late Karl Borch story about the Loch Ness monster. Karl was a first-class economist and a true gentleman. He dedicated his entire life to the study of insurance and the economics of uncertainty. One of his pet example of a market initiative that was in the vein of an Arrow-Debreu world was that of the Scottish whisky distillery that had promissed a significant prize to the individual who would capture the monster of Loch Ness. The distillery was fearing that, despite the odds, somebody may succeed. Well, Lloyd's of London did not shy away and issued a policy to cover the risk!

What is the lesson, if any, to be drawn from this? The lesson is that, in my point of view, contrarily to received wisdom, we do not suffer from an excess of markets. As a matter of fact, a simple look at daily life strongly suggests that we suffer from not having enough markets to fine-tune our exposures to daily contingencies. Think of your home: Real estate prices are volatile. Still, you have to live (to survive?) with them. If you're not convinced please read Yale University Robert Shiller's book entitled "The New Financial Order".

You'll look at the world differently for sure!

P.S.: By the way, Berkshire Hathaway is Coca Cola's largest shareholder!

Why not?

"One man's problem is another man's business opportunity." This is the mantra of Ian Ayres, Townsend Professor at Yale Law School and Barry Nalebuff, Steinbach Professor at Yale School of Management. Both recently published a fascinating book entitled "Why Not?: How to Use Everyday Ingenuity to Solve Problems Big and Small". This is a book about alternative business thinking, about daily problem solving. They take a candid view at the world and wonder why simple ideas, straightforward solutions have not been implemented yet. Truly, this is about thinking out of the box, that is developing a passion for simple ideas.

Want an example? The conflict between Israel and Palestine is hard to solve. Nobody seems to have a vested interest into peace. The "Why-Not" idea is to give individual Palestinians a "tangible, financial stake in peace." Ayres and Nalebuff report a suggestion made by Gideon Parchomovsky and Peter Seligman. The idea is that the United States and Israel buy $9 billion of shares from the Israeli stock market: "The stock would be put in escrow and dispersed to Palestinians ten years after an effective peace plan was in place and certified by the World Court as being honored." This would amount roughly at $3000 per Palestinian at current stock prices. Being long the Israeli stock market would give the Palestinians an obvious incentive to strive for peace and, in the course of doing so, reap potentially fat capital gains down the road.
@
In short, imagination is the limit and the "why not" question should always be on your mind!

Flip-Flap Marketing...

Business has always been tough. It is even tougher when you have to compete with your consumers. Think for instance of the music industry. Thanks to technology the once clear-cut frontiers between the industry and its customers are blurring at a fast pace. The very fact that you end up competing with your own customers is more often than not a vivid sign of their discontent. So, you better listen up to the bad news rather than try to kill the messenger.
Now, you can also take advantage of the situation. In business schools, they teach Michael Porter's value chain. In a nutshell this is a linear value model where your output is my input and so on and so forth. In this model, suppliers are suppliers, producers are producers, clients are clients. Value is added one after another. Well, what if you could turn Porter's chain upside down and see how your suppliers could become your clients and vice-versa, or how clients could become producers. You end up with a value constellation whose concept has been crafted by Richard Normann and Rafael Ramirez. In other words, instead of being challenged by your clients to create better value (for money), you may strive to co-produce this value with them. In a nutshell, there is a time to compete and there is a time to collaborate.

Economics or Eco"i"nomics...

Every coin has two sides to it: Head and tail. Seems obvious. Well, if you consider economics, it seems that people have a marked tendency to discard this elementary fact.
This is sad and more often than not leads to bad economics and poor policies. Economics is precisely the science of the other side of the coin. Frédéric Bastiat, a remarkable XIXth century French economist (who by the way was a major influence on Henry Hazlitt) devoted an entire book on the topic: "What is seen and what is not seen".
This book (who again inspired Hazlitt's Economics in One Lesson) is a must read even if you think you have no interest in economics whatsoever.
In conclusion to this brief post, let me suggest to rename Economics: Let's use Ecoinomics!