Posts filed under 'Economics'

Reflections from a high-speed train (inbetween Madrid and Barcelona)

I often travel the route Barcelona Madrid (and backwards) for the day. By plane it’s rather tiresome and expensive: with an open fare you end up paying around 400€ for a 630 km flight (+ 630 km back).

Barcelona - Madrid is the world’s busiest route with 971 operations per week. The second one is Sao Paulo - Rio (894 per week) then Jeju/Seoul Gimpo (858 per week) and fourth is Melbourne/Sydney (851 per week).

In fact you have to go very low in the ranking to find another crowded European route. That would be Rome - Milan with less than 600 operations per week, which, by the way, is more than the most crowded North American continental route: Las Vegas - Los Angeles (553 per week)

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Source: www.oag.com, data from September 2007

But things change. And this milk cow for the airlines faces its first serious menace ever: the high speed Spanish train service, also called AVE.

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These brand new trains travel the distance of 630km (410 miles) in two hours and 35 minutes. Not too bad when it’s compared with the plane that takes roughly two and a half hours (not just flying but also spent in the check in and departure processes), and possibly more.

But, from an economic point of view, there are many hidden costs that must be taken into account. After all, what is it that you do in a plane? Well, you sit in a narrow seat, trying not to disjoint your legs, and pray that the person that will be sitting beside you is not extra overweight. In the train you have plenty of space. Being uncomfortable has a cost.

How much? Well, it depends on what you’re willing to pay to be more comfortable, of course, and how much your time costs.

How much are you willing to pay for that extra nap? Well, in a 45-minute-long flight, you’re going to have maximum thirty minutes of uninterrupted sleep. You won’t be able to sleep while you queue, while you’re being inspected at the burdensome security checks, while you wait your turn. But on a continuous 2 hours 35 minutes journey you’ll be able to.

As for opportunity costs, you won’t be able to do anything in the plane, apart from opening your laptop for half an hour. It’s completely wasted time. In the train you can use your computer as much as you want, use your phone, combine them and access the internet. Work, eat, talk, whatever you wish.

But externalities must also be taken into account. Environmental footprints can be four times higher for planes than for trains. That means that the train will always be more sustainable and, if we ever are to reflect the true external costs, energy efficiency will give the train an important lead over the plane.

Add those costs up: discomfort costs, opportunity costs, externalities and you will have a very competitive mean of transport. Which only means that competition has been increased, with a comparable service at a better price. In the end, consumers will be benefited from the additional choices, lower prices and the increased service levels that competition will bring.

That was what I was thinking when I decided to open the textbook I was carrying with me. The Managing Financial Resources module awaited me. Fortunately it was half way to Barcelona, 300 km per hour (186.41 mph), still an hour to go.


2 comments 2 April, 2008

The new cycle of capital recovery (who’s financing your debt now?)

Following with the article Financial weapons of mass destruction unleashed in the US (the party is over) that I recently wrote, it seems like the liquidity storm is enjoying some calm. Not a bad thing when liquidity is the tip of the solvency iceberg, and when investors need a break in the increasingly bearish market.

Yes, it all began with an excess of funds that permitted spending in excess. And from that excess, excessive and ultra sophisticated imaginative investing products were made. The trouble is that they were so complicated that the risk wasn’t understood enough, or simply ignored. Now the risk has resurfaced again and debt ratings are on its way down.

In that scenario we had several options: to cut the excessive spending or to find new lenders. Looks like we’ve encountered some new ones.

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The first are the public lenders, also known as monetary authorities. By increasing the monetary mass, and providing low-term credit to low rates, we have financed ourselves. Not a bad thing to do if we were a socialist economy, which we are not. But time will say if we have many other options. I fear we don’t.

Wait, there’s still another option. The ones that actually created the liquidity bubble are coming to our rescue. After all they are the ones benefiting from selling 100$ barrels of dark oil. And now they can come to rescue our banks, our real state using sovereign funds. Suspiciously these new lenders remind me a lot of the old ones…

Both refuel the shrinking bubble in the hope of inflating it again, but in the meantime the true inflation is rising and growth going down the slope. Either we finance ourselves or we trust in opaque investment artefacts coming from non-democratic countries.

But this time, if we are being refinanced, it will be either at higher rates or lower prices, there’s no way to ignore the risk.  Are we really aware of the costs of refinancing? Are we facing the real issue here? Reality tends to be stubborn.


1 comment 26 March, 2008

Financial weapons of mass destruction unleashed in the US (the party is over)

It supposedly began with a bubble. Just another bubble like the one I described on The South Sea Company (or how Sir Isaac Newton spurned the dismal science). The bubble was fuelled by an excess of liquidity. It had to end someday. We learned the word subprimes. We knew it had to mean trouble.

Liquidity injections were administered and succeeded. But they were just patches for a bigger problem. And then they asymmetrised the risk: there were institutions willing to provide liquidity when needed, to reward higher risks, to stimulate the economy further up and away from reality. Until the moral hazard was too huge.

And then it ended too abruptly. The wells of money simply drained and, those whose business was to ensure the efficient distribution of liquidity between the different players just became inefficient. From excess to world wide scarcity, even for sound projects. It became a financial crises.

Few crises have been so focused on the financial system like this one. Because that’s what’s really in trouble here, the whole financial system. I began in the UK with Northern Rock, now nationalised thanks to Alistair Darling. In the meantime Daniel Bouton from Societe Generale didn’t know what was happening in his bank until he lost more than his reputation. And the Swiss face value is also in an all-time-low: just take a look at UBS and Credit Suisse (also First Boston).

But where really is too darn hot is in the US. Bearn Sterns is in flames, expiring his final breath. Bought by $270 million, it was valued about $20.000 million one year ago. A 85-year-old Wall Street institution simply died.

And those that bought companies using leveraging, namely private equity, now see the liabilities piling on top of the roof. Take a look at Blackstone: their profit for the last quarter was less than a half of what was expected, and dropping. Of course its value is dropping too.

We gave it complete freedom. They took it. They invested again and again in the same risky assets, albeit chopped and transformed so they didn’t look like they were the same: collateralised debt, mortgage insurances, mortgage reinsurances, credit swaps and all kinds of derivatives that were the same dog, different collar.

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And when the system was in trouble: more liquidity. Await for some more in the next days. New bolts and flashes from the Fed to try to contain it all. But no regulations… in any case it would be too late for that. And always paying a huge price in inflation… until that game is not longer possible.
The dollar’s dropping. The safe heaven for savings all over the world that financed the US debt has ended. If you add up the soaring energy prices, and the huge public deficits, the US credibility is under minimum. The country risk is dangerously rising… no more overspending, no more cheap financing, the party is over.


1 comment 17 March, 2008

Economy cycles, Schumpeter and tumbling again.

One of the great aportations of Schumpeter was his approach to the Economy from different points of view, not just from a mathematical, technical or mechanical one, but from the diverse social sciences: human history, sociology, anthropology and even psychology.

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I love his concept of the business cycles. They are based on the creative destruction idea. That’s the process that the entrepreneur leads, supported by innovation, to destroy the old way processes were run and substitutes them for new ones. Destruction and creation both at the same time. That means a whole cycle: birth and death. That was in 1911.

But Schumpeter wasn’t the only one talking about cycles. Kitchin also did, in1923, from Harvard. His cycles were bigger than the already well known seasonal cycles, lasting for approximately four years. They were to be known as stocking/destocking cycles.

The legend says that Rothschild had already discovered the cycles before, on Wall Street, around the beginning of the XXth Century. But, instead of making his name famous, decided to use them to fill his pockets. A group of investors followed and, with the help of mathematicians, they found a 41-month investing stock cycle in 1912. If they became rich, they didn’t become rich enough: as of today we don’t know their names. And the cycles are still named after Kitchin (slimmed down to 40 months).

Later, new longer cycles were supposedly discovered: Juglar cycles, around 9-10 years and Kuznets cycles, around 15-20 years…

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And there are also Kondratiev waves, around 48-60 years, and the most disputed of them all. There are supposedly a few Kondratiev cycles identified: The Industrial Revolution (1787-1842), The Bourgeois Kondratiev (1843-1897), The Neo-Mercantilist Kondratiev (1898-1950?) and the The Fourth Kondratiev (1950?- 2010?). The numbers with interrogation marks are of course just approximations written long ago. Could we be close to the end of the Fourth Kondratiev? In any case the projections didn’t know anything about subprimes, wars or energy prices. And Nikolai Kondratiev was a Soviet economist (not that the fact discredits him but he was kind of eager to prove that Western capitalist economies were susceptible to high performance volatility opposed to planned ones).

But, even not having any cycle under his name (an injustice from my point of view) it was Schumpeter who already identified and described the four phases of every cycle: boom- recession-depression-recovery. It’s the existence of the four phases that converts a fluctuation into a cycle. A stubborn aspect of reality that tends to repeat itself (not only in Economy though). This page of the National Bureau of Economic Research about Business Cycle Expansions and Contractions is interesting enough.

Yet again cycles catch so many off-guard. It’s interesting to see…


2 comments 12 February, 2008

Why is the cost of food skyrocketing? (think twice before assuming we’re more hungry)

I’ve been having a conversation about food prices. It’s a fact that they have skyrocketed lately, and they don’t look like they’re going to go down soon. Why is that?

The first reason is, of course, that now we are more people eating. I personally haven’t changed my eating habits, but a lot of Chinese, fortunately, have. The huge Asian country witnessed the birth and nurturing of million of “little Buddhas” that serve as a sign that a lot of Chinese don’t suffer the fate of their not-only-culturally impoverished parents. And the more people eating, the more scarce food becomes, and that drives prices up, the simple law of demand.

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Prices soaring? Not guilty!

Another way of explaining why the prices raise is because of utility. Utility describes what the consumers feel about the products: the more utility, the more people are willing to pay for it. Food is not only useful but really necessary. That necessity is expressed in the price. Utility, thus, is part of the price of the product. If this was the beginning of the XXth century, Eugen von Böhm-Bawerk would say it’s not utility but marginal utility, and he’d be right. The utility depends on the eyes of the beholder. And the utility of food becomes less important as you are fed, and then focus to things like not-so-useful diamonds.

Thus the price is ultimately related to scarcity and utility. Food becoming more scarce means that we’re going to pay more for it. And don’t expect that to change.

But is it so great the difference between food consumptions? A few years ago we had all these surpluses at both sides of the Atlantic Ocean, not knowing what to do with so much cereals and milk, heavy-subsidised goods, and now we are running out of them? That surely would mean great savings for the EU and US governments and tax-payers!

So, where have all the surpluses gone? Have the “little Buddhas” eaten so much? I don’t think so.

A system is, by definition, an ordered set of elements that includes relationships between them. In a price system then, there are not only products, but also a series of relationships that link them. Those relationships are key to understanding the whole system. Some of them establish products as complementary or substitutionary. The former will need each other thus demand of fuel will raise the more vehicles exist, the latter will substitute each other thus the use for private cars will shrink in congested cities that develop efficient mass-transportation systems. In that case the perceived utility for public transportation will be greater for some people, boosting demand.

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Surprisingly substitutive: guilty!

When biofuel was invented everyone hailed the newborn as a chance for sustainable energy production. Now we had something useful and expensive to convert our cereal overstocks into.  Very high subsidies were required to start building alternative sources of energy like this one, but there was a case for it: less dependency from “dangerous countries” and a lot of big corporations interested in the processes (and subsidies). A great alternative to fossil fuels was being born, and also a less polluting one.

But what we didn’t anticipate was that move would tie prices of food and energy together. Thanks to the newly created market distortion (sorry, I mean subsidy) now there are new induced scarcities throughout the food chain: for example less and more expensive grain for livestock for example. Nobody anticipated either, until the Nobel laureate Paul Crutzen did, that more farming requires more nitrogen, and that nitrogen is highly polluting, especially when it gets released to the atmosphere as nitrous oxide (N2O) by means of biofuel.

There are many implications of the use of biofuels, some positive, some are not. But it’s not easy to take a look to the global picture.  In between of so many interested views and sponsored applied science it will take some time and a lot of effort to get perspective on the issue. But one thing is clear: don’t blame it on the “little Buddhas”.


1 comment 14 January, 2008

Apple’s scarcity rent (MacOS X in your PC: the hackintosh is born)

I think there’s little discussion that Apple’s operating systems are much more usable and friendly to the user than the ones created by Microsoft. Given the fact that the first used to precede the latter that could mean also a lack of observation skills by Microsoft, but that’s not the point. The point is that denotes a different strategic positioning for each company:

  • Apple is focused towards customers. No redundant or extra menus, just the basic essential needs. utmost usability. But the trade-off also comes to one price: lack of support to several devices or open platforms. To ensure a controlled experience, controlling the hardware becomes necessary.
  • Microsoft is focused towards providers. They define an open system and they build hundreds of thousands of drivers to be able to include each and every hardware even made. They are backwards compatible, ensuring the incorporation of legacy systems. The downside: too much variety hampers your ability to control the user’s experience.

The focus to providers, to the whole industry, means building a cluster of companies around that are able to freely introduce their products to an interoperable market. That’s quite interesting, isn’t it? Companies are able to build their own standards, to compete, and Microsoft simply supports them.It seems that a user should choose between a system tailored for her or a system thought for interoperability. Tough choice, huh?macpc.jpgSimplified like that one would say “let’s choose a system designed solely for the users”. But that’s not quite true. Both systems have users in mind, only a divergent focus. But a focus towards the industry means being able to access a pool of competing hardware. And that means lower prices… ain’t that nice for the user? Maybe the focus wasn’t the user, but she is directly benefited of having an interoperable and open hardware industry.That’s why the nerds simply won.But history makes strange turns. And Apple has changed a lot through the times. Two important swerves:

  • Intel was PC, Motorola was Mac. Intel was winning in price and product. Mac switched.
  • PC was MSDOS, and always backward compatible. Mac wasn’t, and in a bold move decided to switch to UNIX. Now Mac is more stable.

And the result is that Mac is standardised in its kernel and equipment, dwelling in the well of PC-compatible hardware and leaving behind its own proprietary hardware.There’s no real hardware difference between a PC and a Mac any more. Only slight differences that make them slightly different. That’s all. And, on top of it, a very different OS working in (almost) the same setup.And then Apple made another bold move. Decided to go open source. I could write a lot about open source, but the main point of it is releasing the sources so that developers can make better working programs and the quality of the applications and the user experience can be enhanced.And some hackers just did it. Netkas, ToH, BrazilMac and many more rebuilt the system kernel and adapted a few drivers so Mac OS would work in a standard (and advanced enough) PC setup. And voilà. MacOSX was born. Hackintoshes were born.

picture-1.pngtake a good look, this picture is for real, MacOS in my PCIt works, I promise. I have both systems installed (for educative purposes of course) and MacOS X simply rocks. It makes the most of your hardware. Far more stable, far faster, far more usable.MacOS X version 10.5, also called Leopard, was hackintoshed just one week after its launch. So, if it can be done, why aren’t they?Why keep making software for a minority instead of addressing a big market share? Apple wants to keep selling its hardware… that’s a reason enough. Apple wants to segment its public, that’s another reason too. Is Apple learning from hackintoshers or would prefer them silenced?Let’s say it all loud. PC and Macs are no longer different. Many of us, PC users, could be able to choose between two operating systems tomorrow. Microsoft’s monopoly could be broken, and Dell could be providing alternative hardware to Mac users tomorrow, breaking Apple’s monopoly too. Two monopolies that do their best to help each other, regardless of appearances.Why must we be constricted to only one OS? Why should the OS determine who you buy your hardware from? There’s no objective reason for those market imperfections that are simply hampering consumers.Unless Apple decides to fire first…get-a-mac-1.jpg


5 comments 21 November, 2007

(The mistake of) further leaning the supply chain in difficult times

Operations have always interested me. I’ve worked with supply chains, studied them, comprehended them. But, what I don’t understand, is why that motto of “leaning the supply chain” is considered an universal truth. Reminds me that one of “leaning -and trimming- the organisation” whose long-term results -only now are beginning to be known.

Because sometimes leaner is simply not the most adequate choice. Sometimes you need to be able to offer greater flexibility, better response, even at a greater cost.

What did prompt this reflection in my mind? Well, a friend of mine wanted to buy a new car, so I told him it would be a good moment because the car sales had dropped around 10% this year in Spain.

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It looks like the bargaining power of customers has increased, hasn’t it?

Well. In fact something slightly different has happened. Concessionaires have resolved to reduce costs, specially reducing stock. They only have the star models, but not anything that may be a little customised. That means nine months for my friend to get the model he wants. Can you imagine that?

I understand that promoting a series of basic models by penalising the consumption of the rest of the catalogue is a way to reduce variability and variety. But that could be useful in a highly busy and stressed supply chain and that’s not exactly the case.

In this case I understand we should focus the supply chain in some strategical intent to promote sales in a weak season. That way we shouldn’t want to reduce variety but induce new sales. And that means offering an appealing selection for the customer and an improved service. I don’t exactly see improved service with lead times around nine months.

In this case, the savings are surely lower than the opportunity cost of not selling a model. Specially when you still have plenty of space left in the premises (I bet they have not shrunk because of market’s weakness), and specially when competitors may have chosen a different strategy.

Sometimes some savings are simply not worth it.


2 comments 24 October, 2007

The darker side of economics (how well intended theories can get the worst out of MBAs)

Those that hold a degree in economics will surely know three different and diverse theories: (just follow the link to know more about them)

  • The agency theory: that describes how managers and shareholders pursue different objectives and thus need to be aligned through both control and appropriate rewards. Shareholders will want returns and value, managers will want their own returns, power, and to increase their personal value.
  • Transaction cost economics, defined like the additional costs to a product than those to produce it, that is to control its fair use and distribution, the cost of formalising the relationships between the product and the user, to prosecuting breaches of contract and punishing offenders.
  • The five forces analysis, by Porter. This one needs no presentation. This model describes the strategic positioning based on the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products as well as the level of competition in an industry.

I could mention many more. But those three are specially interesting. What do they have in common?

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Sumantra Ghoshal (1948-2004) is known about his theories about transnational companies, and the matrix structure (my beloved matrix structure, I must say, this morning I was proposing using it for a new project… but thats a whole new story)

Ghoshal worked in a couple of well known business schools, and ended up founding the Indian School of Business, so he was not an enemy of the MBA spirit, but he directly blamed corporate scandals such as Enron on MBA courses. Why?

Because business is a social science. (Remember the reflection I made, long ago, about Economy as a Science?) Well, sciences must be held with care. Sciences must be thoroughly studied, interpreted and understood.

Specially social sciences. Those do not only describe reality, but they are also able to change it. I reflected long ago on how a science like Economics could rewrite itself (See the Phillips Curve in the previous link). Ghoshal thought the same. In fact Ghoshal thought that the (incomplete) knowledge of a social science could change our mindset. Like those that can be taught in a fast, practical course such as an MBA.

Now let’s go back to the question I left unanswered. Yes, there is something in common between those theories…

They distrust people. They focus on the darker side of humanity: managers will cheat, companies won’t collaborate, customers will breach the contracts… all of them need badly to be controlled, sometimes even prosecuted. That’s the way. Some cheat, some control and the bottom line: it’s all a trade-off.

Those that excel are those that are able to play with the system and not to get caught. Does that ring a bell? Enron’s managers got it very clearly. They played, they tried, they lost. And not only them, many more did.

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The title focused on MBAs but that can be true for any executive education. Our mindset defines our behaviour. And even well intended theories can made us adopt an incorrect mindset, inadvertently. A mindset that can make managers behave opportunistically, drawing conclusions from incorrect assumptions: people will try to cheat you.

And if you, as a manager, interiorise that, to hell with positive theories about managing people.

Well, some people will try to cheat you, but some will not. It’s not a definite behaviour. What about ethics? People do have a choice! And people can still have integrity. And you have the choice to manage with integrity.


6 comments 4 September, 2007

Four ways of thinking I: utilitarianism or thinking about the consequences (Stuart Mill and Bentham)

We make decisions all the time. And when we don’t, usually, problems become graver problems.As you know, it’s better to make the wrong decision than to make no decision at all.

But, on what basis do we construct our decisions? Some people are more practical than others, some people think more on the human side, some people abide to their principles no matter what, and some worry a lot about the consequences.

In fact the most considerable bulk of humans, and that includes me, just mix different ways of thinking and making decisions. We are not pure in our decision making. And the proportions change from one person to another. They depend on the mindsets, the circumstances, temperaments or even circumstantial moods.

We always think of our decisions as the most rational ones. We tend to perceive ourselves as non-biased. But we can’t help seeing the world through our filters. We reflect what we are on the decisions we make.

In this series of four posts, that altogether configure a meme, or a basic cultural unit, I want to identify four basical thinkers that defend very specific ways to make decisions.

These four basic ways of thinking are present in each one of us. They configure an important part of our decision making process, impersonating four different perspectives to every decision.

Think about them. They will help you understand the mental process that makes you consider different options and thus four different ways to weight outcomes. And they will help you in knowing yourself better and, why not, into making better decisions or at least understanding your decisions better.

The first way of thinking is consequentialism or utilitarianism.

One of the thinkers that most effectively impersonates utilitarianism is John Stuart Mill (1806-1873). Many things can be said about him. In fact he is worth much more than one post, being his thought configured by his father James Mill and his father’s friend Jeremy Bentham.

Stuart Mill was a deep boned liberal, fending for a slimmer and democratic government limited by individual freedom.

How would he reason? He’d think of the consequences of the actions. Thus, when we impersonate Mill we think how what we are about to do will affect on others. The concepts of utility and happiness come into front view. They become important under utilitarianism.

In fact he followed the ideas of Bentham, close friend to his father and mentor to the young John.

Jeremy Bentham was also British, and lived from 1748 to 1832. He can be considered the father of utilitarianism He was a liberal, defending the most basic rights, from the right to freedom in a world that still practised slavery, to the suppression of physical punishment, widely practised not only in prisons but also in schools, and specially the right of the individual not to be limited by the state in any way short of affecting negatively his fellow citizens.

In fact he’d be happy today to see that some of the subjects that he was worried about are being considered today. He supported the equality of women in every way, animal rights, the right to divorce and even homosexual rights. And that was 200 years ago! Education was essential for Bentham too.

In the economic sphere he abhorred of monopolies and usury, free trade, inheritance taxes, pensions and insurances. Both Stuart Mill and Bentham are usually regarded as proclaimers of a minimal state, but that’s not true. The individual freedom is paramount, but the states must guarantee basic rights and a basic equality to protect those who suffer. At the same time, the states must foster economic growth so as to facilitate a minimal subsistence level and encourage wealth.

Most of all, he incised decisively in a society, the British society, so fond of its traditional approach, initiating a wave of change, a progressive change towards a new idea: the well being of the majority. Well being that could even be translated to happiness. So the decisions in Britain had to be taken thinking of the population, and those who were affected by them.

The following quote from Bentham defines good and bad, moving closer to hedonism.

“Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do as well as to determine what we shall do. On the one hand, the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne.”

Consequentialism was thus being born, shaking the foundations of the British society and starting a movement to change the laws -another sphere of decisions- to have them aligned with the majority, not with the privileged ones. That was a huge leap towards progress and a fairer society. This wish for reform would help Britain to evolve further, no longer being constrained by mediaeval concepts. And with Britain, more nations followed in the will-be-developed world. No wonder Bentham supported both the American Independence and the French Revolution.There are differences between Bentham and Mill. The first thinks of the majority fostering the critique about the majority dictatorship. The second is able to modulate all that into a more sensible and respectful approach for the minorities. Stuart Mill had more time to elaborate and adapt his thoughts, and had an increased social component in his thought.

But, back to decision making, what counts is that we make the decision thinking of the consequences, not out of principles or rules inherited over the centuries, not faith or revelation. There’s not statu quo to preserve, good intentions or psychological reasons, there’s only utility, general utility. The more useful the better.


Add comment 31 August, 2007

Thinking strategic (from organisations to the economy)

Coming from strategos, the greek word for general or commander, this is one of the most used -and missused- words all around. People use the world strategy to make their position more sexy, combining it with words like direction, information, product, customer or even online, web 2.0 and blog. Always followed by strategy. That way you can give your card proudly.

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In this card you can also read the strategy!!!

The Chinese had their say with Sun-Tzu, that was the first strategy writer ever to be known. He was so good that his book, The Art of War, is still widely read today. His ideas are about winning the battle before the battle is even fought. For that you need to convince your enemy that you’re strong in places you are not, and hide your strongest points, so that he is moved to a position of weakness. In this position of weakness you can overcome a stronger enemy.

And then, when the battle is fought, we move from strategic to tactics. That means we associate the strategy concept with planning, and tactics are closely related to execution. Long run against the short run.

Another point of view, strategy sees the big picture, the systemic view. (See the Why systems thinking? post). Tactics seek to optimise locally, in execution, right now. Tactics are operational. Think about allocating resources, doing the most of what you scarcely have. Some things that come naturally, decisions you just have to make.

While strategy is not obvious at all. It’s necessary to forget your day-to-day, step back, try to see it all, reflect, interiorise, learn, generate new ideas, evaluate them, multicriterise them, plan.

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I’m not going to focus on Ansoff (or Porter afterwards) that are always referred as father (and nourisher) of strategy. Tracing the roots of economic thought, we can find someone in the 19th century that was already grasping the idea. It was Germany and later in the US, and this man is an economist: Friedrich List. He didn’t live long. After a fortune reversal in America, he committed suicide in 1846.

List defended the idea of national economics, an important rule for the state in the economy. He proposed high tariffs on imported goods to protect the local industries, that is protectionism, plus the government implication building infrastructures and the need for a national central bank. Do those ideas sound familiar to you? In fact, with Alexander Hamilton, he cofounded the American School of Economics that is still alive today, only to be confronted by Keynesianism in the mid-twentieth century.

But the funny thing is that he also had a big influence on the other side. He was offered the editor post of a new liberal newspaper in Cologne, Rheinische Zeitung, that he didn’t accept for health reasons. Guess who accepted? Karl Marx.

Why is that important? List saw the need to plan by the state. There could be no nation letting individuals seek their own interest when that interest could harm colective interests. Freedom meant suicide for nations. There was a need to plan and decide thinking of the big picture: the state.

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When Ansoff wrote about strategy in the mid-1960s, those ideas were heavily assumed by society. Democratic countries also needed central planning. Even companies did. Igor Ansoff, an American professor of Russian origin was the one to collect the imputs of those diverging currents and wrote the first book on strategy planning. Engineer and mathematician, overly analytical, he defined strategic decisions as those that would not generate themselves, opposed to operational and administrative decisions.


Add comment 20 July, 2007

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