At the intersection of technology, finance and the Pacific Rim.

Saturday, May 31, 2008

Questions for the Week

What is the difference between scalability and economies of scale?

Economies of scale usually refers to the size that one must become in order to be profitable in a company’s operating environment. Technically speaking, it is the increment of profit that may be earned at the margin as you increase production. Scalability, on the other hand, refers to the ability of a company to grow—i.e., the resources or assets that a company must acquire in order to achieve rapid growth. Thus one can say that a company that has achieved economies of scale has addressed the issue (to date) of scalability. The two are very much related but not quite the same. Also, scalability is a relative term—what is scalable for a big company is not necessarily the same for a smaller firm with less resources.

Is direct more efficient or is distribution more efficient? How can we analyze the issue?

The answer revolves around the requirements and economics.of serving the end customer. The first criteria might be the cost of the sale itself relative to the value of the product. If you are Coca Cola, it is highly impractical for you to sell to every small convenience store out there. You would have to hire too many sales people and you could very well hit a point of “dis-economies of scale” as your organization would be flooded with salespeople whose job it was to sell a couple cases of coke each to literally dozens of convenience stores in their area. And then once you have sold it, you have the probably of fulfilling the order. An organizational nightmare. On the other hand, if the customer were Walmart, it could very well make sense for you to sell direct—and the rise of superstores has certainly disrupted the traditional distribution system in the US (in addition to the retail market as a whole).

Also whether you have a one tier system (direct) or four tier system (wholesale, to smaller wholesaler to retailer) you have to consider about how the end customer is served and what that end customer needs. Customer service is a key second criteria. It may very well pay for you to sell trucks that might cost $200,000 on a direct basis. After all, a salesman might go to one company and sell four to five trucks in one shot. But then the question are, “how do you service the trucks?” and “how do you get them spare parts for after sales service if they are doing their own truck service?”: This issue also contribute

I usually think of distribution as “outsourcing” of sales and service part of serving the end customer. Perhaps when put in this language the exercise of determining whether to go direct or through distribution becomes a little easier conceptually. The advent of the internet and supply chain management functions has also changed the economics of doing things on a direct basis. It is easier to reach the end customer and also the function of inventory management (an important role of distribution) becomes a lot easier through the internet and IT.

What is the difference between Winner Take All and High Scalability?

There are some cases of “Winner Takes All” but I would argue that in each case it had to do with the economics of serving the customer and yes, economies of scale. Microsoft was able to be in this very unique position, because imagine a world (in the 1980s and 1990s) where the operating system was not standardized and the work you did could not be used by others. So there was some natural inclination toward a monopoly. Similarly in telecom there might be a similar tendency if you lay expensive fiber optic lines to the home—it could very well be inefficient for two players to compete in the same place. Similarly electric utilities might be another example. These points raise interesting policy issues for government involve

Thursday, May 29, 2008

Supply and Demand in Oil

The Dealmaker reports:

Better to just know the cold, hard facts. And these are some goodies: Petroleum shipments from the world's top oil exporters dropped 2.5% last year. During that time, oil prices soared 57%. Those two things used to be mutually exclusive. Now they are happening at the same time. And no one seems to think it’s going to stop.

LGE and GE

LG Electronics is reportedly discussing the acquistion of GE's home appliance division. Reuters reports:

"The players have become somewhat obvious," Immelt told reporters in South Korea. "It is Haier in China, it is LG in Korea, it's Mabe in Mexico, it's Arcelik in Turkey."
In Beijing, he added another name to the list of suspects: "Whether LG or Haier or Electrolux or others participate remains to be seen."

Tuesday, May 27, 2008

Emerging Markets and Telecom

Bharti, the largest Indian mobile operator announced last week that they had suspended their discussions to merge with the MTN Group, an African centric mobile operator with operations in over twenty countries, in their bid to create a global mobile operator. Shortly thereafter, Reliance, another large operator in the country (over 40 million subscribers) announced that it had entered into exclusive discussions to merge or acquire with MTN.

For details, see this link with the NY Times. Note how big these companies are.

Sunday, May 25, 2008


How to be innovative in the face of intense competition--this is one of the core themes of CEOs today. One company that has so far done well at it is Procter and Gamble. A.G. Lafley was interviewed by the NY Times and this is what he had to say:

Q: only half of your product innovations succeed. Why isn’t the rate higher?

A. I don’t really want it to be. Human nature is such that, if we push our people to drive the batting average up, they’ll try to hit more safely, take a shorter swing, go for the singles instead of home runs.

But we try to set milestones that innovations must meet at every step along the development process. As soon as they miss one, we allocate the resources to another product moving through the funnel. That’s another difference from the old days, when P.& G. let bad ideas go too far.

Friday, May 23, 2008

Jim Rogers--Adventure Capitalist

Jim Rogers is one of the most noted international investors--having worked with George Soros in the 80s in the Quantum Fund, which returned 4,200% over the life of the fund--probably 10 years up 42 times. Not bad. He is interviewed on CNN--watch it and learn how being in the minority is good for investing.