Monday Oct 12, 2009

Oliver Williamson Wins the Nobel Prize in Economics

Some 5 years ago, I started my first entry on with a brief note quoting from an essay by Oliver Williamson about strategizing vs. economizing. (That essay was published in his book, The Mechanisms of Governance.)

It is most fitting that I should end my series of blog entries on with something about professor Williamson, too.

Today (October 12, 2009), through a series of accidents starting with a doctor's visit in Alameda, I was actually passing through UC Berkeley when my wife called me with the news of professor Williamson winning the 2009 Nobel Prize in Economics. I was luck because I was next to the Haas business school building and I had a real chance to drop by professor Williamson's office and to congratulate him in person. What a great honor, and what a great and most appropriate choice for a recipient of this prestigious prize in economics!

Thursday Aug 06, 2009

Clunkers and Financial Institutions

Cash sent to financial institutions corrects ("fills" gaps in) balance sheets to improve credit-worthiness and loan-giving capabilities. "Cash for Clunkers" removes depreciated assets prior to their end of life, generates demand and creates economic pull throughout. Small actions at points of leverage can produce much larger effect than much larger actions at other points.  

Monday Jul 27, 2009

Electricity Usage

Reports say 2009 will be the first year since 1945 that electricity usage has had a year-over-year reduction.

Projected percentage change in worlwide electricity usage this year is expected to be -3.5.

This data, whose source is the International Energy Agency (Paris), was published in the August 2009 edition of the Harper's Magazine. The magazine has a famous 1-page Harper's Index of various indicators.

Thursday May 07, 2009

Puzzling on the Value of Bundles

Measuring values of a product bundle, particularly when the bundle contains non-equal or potentially complementary lots, has puzzled economists and business strategists alike. I don't claim to have solved the puzzle but I have puzzled on some other aspects of the problem in a short three page briefing I wrote a few weekends ago.  

Saturday Feb 28, 2009

The Three Forces of the Long Tail and the Classic Market

Chris Anderson's study of The Long Tail identifies three economic forces that the modern computing technologies, the Internet and the Web have helped unleash: (1) Improvements in tools of production of content and goods. (2) Improvements in tools of distribution. (3) Reductions in search costs through improvements in search technologies. (When we speak of "search technologies," we should understand them to mean any method of search, including the physical search, which is the "classic" search technology.)

These three forces join and orchestrate a move, in the consumption curve, from "hits" to "niches".

The argument is that this increases overall economic value. It does, indeed, for some firms and large numbers of consumers that engage in related "modern" search-and-consume activities on the Net. However, the classic market economy does not improve and will suffer, without a fast enough replacement in all niches and certainly in "hits" which provide the batteries for the classic market. Unless we reformulate the classic consumption game in new innovative ways, through innovations in general logistics of moving people and goods, I remain skpetical whether the replacement rate will be sufficient to outpace the overal reduction in consumption due to the diminishing physical search habits.

Sunday Feb 08, 2009

Interoperability and Innovation

Most software professionals already know about the important role interoperability plays in fostering innovation. In a recent commentary in Financial Times ("Interoperability: the great enabler"), Michael Schrage, a researcher with the MIT's Sloan School of Management notes

Barriers to interdisciplinary innovation tumble. Favourable economics of interoperable innovation will tempt ambitious "inter-preneurs" to test their ideas.

How might interoperability between Siemens cochlear implants, Apple iPhones, Nike running shoes accelerometers, LG microwave ovens, Nintendo Wiis and BMW Series 3 Sedans create bold entrepreneurial, or diversification, opportunities? Who knows? But the fact that the question piques curiosity reveals fundamental changes in the global innovation climate.

A new innovator's dilemma begins to attend the extent of interoperability in products. 

Tuesday Dec 02, 2008

Inescapable Facts of Mass and Distance

It is not clear whether Liam Denning was writing prose or an article on supply chain management and global logistics. Good writers lurk everywhere.

I will have to quote his whole article from The Wall Street Journal to make my point.

Ship Ahoy: New World's Supply Chain

By Liam Denning (The Wall Street Journal, December 3rd, 2008)

The world is bumpy.

In the age of globalization, conventional wisdom holds that supply chains prioritize labor-cost arbitrage over mere distance.

Geography, however, could make a comeback. Triple-digit oil provided the first intimation of this. Jeff Rubin, chief economist for CIBC World Markets, estimates $150 crude oil boosted the cost of shipping imports to the U.S. by 11%, costing roughly as much as trade tariffs in the 1970s.

Crude now trades under $50 a barrel, but the crash reflects faltering demand more than rising supply. When demand recovers, oil prices will, too.

Marc Levinson, author of container-shipping history "The Box," suggests the world also is hitting the limits of economies of scale in logistics, citing bottlenecks at ports and congested road and rail networks. These impose costs and delays and, as supply chains have become more complex, more potential points of failure. Initiatives forcing ships to reduce harmful emissions also will weigh on economics.

Innovation could change the equation again. But the ultimate facts of mass and distance are inescapable when it comes to rethinking logistics.

One answer will be shorter, regional supply chains -- a phenomenon observed in changing sources of U.S. imports during the 1970s oil shocks. That ought to have positive implications for exporting economies such as Mexico, while China could suffer.

U.S. workers cheered by the prospect of jobs returning home, however, shouldn't be too jubilant: Globalization and labor arbitrage aren't going away. And rising supply-chain costs mean U.S. workers will pay higher prices for the goods they buy.

Thursday Nov 20, 2008

In Need of an Economic Strategy

Michael Porter, the business strategy guru from Harvard, writes about "Why America Needs an Economic Strategy".

His essay deserves a careful read by business and political leaders in the U.S.

Tuesday Nov 18, 2008

Generation Graphics

This graphic display of U.S. housing starts, based on data from the U.S. Census Bureau and published by The Wall Street Journal, grabbed my attention.

Real Estate prices are actually a complex non-linear function of interest rates, housing starts, employment, and existing re-sale inventory — and yes, location.

Monday Sep 22, 2008

Profit and Leverage

Jon Hilsenrath, Damian Paletta and Aaron Lucchetti, "Goldman, Morgan Scrap Wall Street Model: End of Traditional Investment Banking," The Wall Street Journal, Sept. 22, 2008:

The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Saturday Sep 20, 2008

Strong Positive Feedback and Tippy Markets

In network economies, the number of compatible users (or network end points) determine the value of the network. In such economies, one may experience strong negative or positive feedback. When the number of compatible users goes down, the network will eventually suffer a "vicious" cycle of collapse. On the other hand, when the number of compatible users goes up, the network will enjoy a "virtuous" growth cycle.

In Web 2.0: A Strategy Guide — Business thinking and strategies behind successful Web 2.0 implementations, Amy Shuen writes:

When two or more companies are in a competitive race for market share where there is strong positive feedback due to network effects, only one company emerges as the winner. (Economists call this market tippy because it can tip in favor of one company or the other.) Strong positive feedback can lead to a winner-take-all market dominated by a single firm or technology.

Monday Sep 15, 2008

Avoiding "Moral" Hazard

In a credit crisis, the "lender of last" will weigh options, now having to balance the desire to provide liquidity versus its desire to ensure market dynamics ("Credit Crisis Strains Government's Options," WSJ, Sept. 12, 2008):

Officials are also acutely aware of the problem of "moral hazard." Bailing out too many firms, the reasoning goes, would encourage more risk taking in the future. That makes officials reluctant to be seen as rescuing another institution. The Fed made a $29 billion loan to help J.P. Morgan take over Bear Stearns. It's not clear that it would be willing to do that for another firm.

Treasury Secretary Henry Paulson has said that institutions must be allowed to fail and that markets can't expect the government to lend money or support every time there's a crisis. "For market discipline to constrain risk effectively, financial institutions must be allowed to fail," Mr. Paulson said in a speech in July.

Saturday Aug 16, 2008

Organizing Production

In his Contemporary Strategy Analysis, Robert M. Grant describes a more recent phase in the long evolution of economic organizations:

As late as 1840s, the largest enterprises in the US in terms of numbers of workers were agricultural plantations. Most manufacturing was organized through networks of self-employed, home-based workers. The English woolen industry consisted of home-based spinners who purchased raw wool (on credit) from a merchant to whom they sold the yarn; the merchant resold the yarn to home-based weavers from whom he purchased cloth. This "putting-out" system survived until the onset of the Industrial Revolution. With the advent of water-powered looms, weavers moved to factories where, initially, they rented looms from factory owner by the hour. Factory-based manufacture made this system of independent contractors inefficient—it was difficult to schedule machine time, and there was little incentive for the independent workers to look after their rented machines. The emergence of firms where market relationships among workers, machine owners, and merchants were replaced by employment relationships between the owner of capital and the workers was a more efficient means of organizing production.

The issue of relative roles of firms and markets is a central aspect of economic organization. In the capitalist economy, production is organized in two ways: in markets (by the price mechanism) and in firms (by managerial direction). The relative roles of firms and markets is determined by efficiency… 

Thursday Aug 07, 2008

Fast Strategy Introduction

Published by O'Reilly, Amy Shuen's Web 2.0: A Strategy Guide: Business Thinking and Strategics Behind Successful Web 2.0 Implementations gives a fast, well-written introduction to the strategy, economics and business of Web 2.0 companies—all based on cases that should be familiar to the reader. 

Tuesday Aug 05, 2008

The end of the deep freeze

After the two great wars (WWI and WWII) and particularly after the first one, the world went into a deep freeze over international trade. Whole sections of the world were forcefully left out of its active commercial core. Political storms divided natural trade partners and put their commerce into a deep freeze. In the new millennium, those affected have fully woken up to the grander design of the world trade. So, now, we can read the following in Financial Times ("Sino-India trade wave captures banks' attention," August 4, 2008), as a normal course of events:

Sino-Indian trade last year climbed by 56 per cent to $38.7bn, according to Chinese data, and could reach $60bn as early as this year rather than in 2010, as was previously expected.

This is still pittance compared to the major bi-party trade figures in the rest of the world but looking at the growth rate will tell you where we are heading. Will the world commercial core next shift to where it was 800 years ago?

Sunday Jun 08, 2008

Subtle Significance of Job Satisfaction

I quote the following passage from the conclusion to Dennis W. Organ's paper ("The subtle significance of job satisfaction," Clinical Laboratory Management Review, (Jan/Feb 1990) 4, no.1, 94-98):

Management research and theory have taken a long time and a torturous path in catching up with the insights of Chester Barnard. More than half a century ago, Barnard noted the essential condition of the "willingness of persons to contribute efforts to the cooperative system." This quality of willingness "is something different from effectiveness, ability, or value of personal contributions...[it] means self abnegation." Willingness is characterized by "[an] indefinitely large range of variations in its intensity among individuals" and, within individuals, "it cannot be constant in degree." Finally, this "willingness to cooperate, positive or negative, is the expression of net satisfactions and dissatisfactions experienced or anticipated."

Barnard underscored the very nature of organizations as cooperative systems. Rules, structures, policies, job descriptions, sanctions, incentives—they all play necessary roles in collaborative endeavors, but as derivatives of, not substitutes for, the underlying disposition to cooperate. Such a disposition can be sustained only by a sense of organization as a microcosm of a just world. Occasional inequities can be tolerated if there is faith that the system works fairly over the long run, with self-correcting tendencies. When faith leads to a narrowly defined, quid pro quo contractual relationship, the disposition to cooperate ebbs. Surveys show that most of the nation's labor force begins work with a fairly high degree of job satisfaction and that most of the people, most of the time, will describe themselves as "all in all, satisfied." There is a generally prevalent inclination to give the employer the benefit of a doubt—"I'll assume you're treating me fairly until you persuade me otherwise." So the disposition is generally present to render a substantial contribution via OCB [Organizational Citizenship Behavior]. A good-faith effort by managers to provide a "square deal" will do much to ensure the quality of OCB.

Tuesday Apr 08, 2008

Open Source Databases on the Rise

Christopher Lawton of The Wall Street Journal reports on the rise of the open source databases:

The potential benefits in cost and flexibility have not been lost on customers. The market for open-source databases is expected to grow 35% to $270 million this year from $200 million in 2007, according to Gartner Inc. Among the earliest adopters are midsized companies, which don't always need the high-end features of conventional databases, says Carl Olofson, analyst with IDC, a market-research firm.

For example, Sun Microsystems Inc. provides supported offerings of MySQL, PostgreSQL and Java DB (Apache / Derby) to its customers.

If you're interested in discussion and community around open source database technologies for Solaris, see here.

Sunday Feb 24, 2008

Microsoft and Open Source Software

As the news of Microsoft's moves last week unfolds, strategists might find it useful to review "Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows," by Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School.

Working Knowledge carries an interview with the authors.

Monday Feb 11, 2008

"Asset Specificity" and Open-Source Software

Despite some excellent coverage of issues related to transaction cost economics of Open Source Software in The Success of Open Source (Harvard University Press, p. 193, "Business Models and Law"), Steven Weber may have misapplied Oliver Williamson's concept of "asset specificity" as an attribute of transactions .

Weber seems to be saying that Open Source Software, by virtue of its openness, will reduce asset specificity for those (including enterprises) who consume or use software, releasing them from lock-in. While the effect might be true, the reasoning diverges from the original meaning of the concept of "asset specificity," as coined by Williamson.

In The Mechanisms of Governance (Oxford University Press, pp. 59-60), Williamson states that his concept of asset specificity refers to "the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value."

To clarify matters further, Williamson notes that there are varieties of asset specificities, e.g. (1) site specificity, (2) physical asset specificity, (3) human asset specificity ("that arises in learning by doing fashion"), (4) dedicated assets, (5) brand-name capital, and (6) temporal specificity. 

Let me elucidate the concept by giving some examples.

If I use some assets, say my Prius, to drive to the local supermarket to buy oranges, I have not used any assets specific to the transaction of buying those oranges. The transaction is a fully market-driven transaction. I could buy the oranges from a large number of groceries that do business near where I live.

Now, assume I'm an orange broker in Florida. I may station my operations site near the largest orange groves or near the largest auction market for oranges. I may buy some forensic equipment specific to orange analysis, and pay for membership dues in the orange auction market, etc. I may spend money to brand my brokerage service, calling it "Honest Oranges." Now, I've invested in assets that have a higher degree of specificity (in site, in physical nature, in brand capital, etc.) in order to carry on with the transactions I conduct as an orange broker in Florida.

Now, let's turn from oranges to software.

When it comes to software, we can have some in-dept discussion of each of the specificity types mentioned by Williamson and see if there are others. For example, the Internet, the digitalization of storage, content and distribution, has almost done away with "site specificity." You can consume software made in city A even if you live 12 time zones away in city B. On the other hand, some software must still be installed in a particular way and on particular hardware, generating a "physical asset specificity" effect.

The most important kind of specificity when it comes to software, however, is "human asset specificity."

When an enterprise uses open-source software, they still have this aspect of specificity to deal with. For open-source software, as for any software, human specificity arises in learning by doing fashion. In fact, human asset specificity governs the software transactions world much more deeply than many other product types.

Unless there is a backing from a supplier that has reduced the need for investments with high degree of "human asset specificity," the user of the open-source software will have to make such investments on its own.

This is exactly the reason why we see great consulting, services and integration businesses thrive around open-source software products.

Friday Feb 08, 2008

What is Open Source?

Open Source is not just about code that can be viewed and tinkered with freely. It is also about products, people, participation, communities, institutions, cultures, economics, business models and complex property rights. It is also about developing very complex products according to property rules and in organizations that make rapid development and progress possible. With their existence, open-source communities have anticipated a new, general model for collaborative creativity.



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