One of the most important challenges of management in the real world is how they can make their businesses truly competitive. Competition drives firms to be efficient and effective and to invest in technological innovation to provide improved ways of satisfying customer needs and wants. Such progress depends on the continuing ability to make sufficient profit to ensure survival in the short term and to invest for greater success in the long term. That is what real business is about.
Economists, such as Michael Porter, influenced generations of the leaders of finance, industry, the media, academia and politics, with their theories of competitive strategy, which were based on the not very profound equation that sales revenue minus cost equals profit. Therefore the way to maximise profit – which, for these theorists, is the whole purpose of business – is to have the lowest costs or highest prices.
The way to achieve the lowest costs is to have the biggest sales volume and therefore the greatest economies of scale. The way to achieve the highest prices is to make the product different in some way for which customers were prepared to the highest premium. So long as these processes are not interfered with by government regulators, then, according to the theory, the rules of perfect competition will apply and the consumer will be the ultimate beneficiary.
How does all this apply to the energy supply market?
Continue reading Energy, Competition and Pretence
Three facts about 2016: UN reported that 102 million people were on the brink of starvation, up 30% on 2015; Sir Martin Sorrell, MBA, defied investors and paid himself £70m; asked why he hadn’t paid any tax over the previous eighteen years, Donald Trump replied ‘[b]ecause I’m smart’. Is there a connection?
The world is facing destruction in various forms, from the loss of social cohesion by unsustainable and ever increasing levels of inequality of wealth and income, both between and within economies, the waste of finite resources, the pollution of oceans and atmosphere, a looming mass species extinction and the avoidable inevitability of global warming. All that against a background of exploding global population, from 1bn in 1800, 3bn by 1960, 7bn by 2012 and forecast to reach around 9.5bn by 2050.
Business historian Alfred Chandler suggested that business was the most important institution in the economy and its managers the most influential. It was, he argued, considerably more powerful than Adam Smith’s ‘invisible hand’ of market forces. Clearly, business could play the lead role in correcting those damages. But business is destroying the Earth.
Business leaders do not just command business. They are also influential over finance and the media, as well as academia through their funding of research and academic institutions, especially business schools. And they are hugely influential over political decision making through their £multi-billion funded lobbying industry, politically oriented think-tanks and the operation of revolving doors through which individuals progress between these various sectors and government. Those are the various components of what Roosevelt referred to as ‘organised money’ when he ended the austerity driven Great Depression by introducing the New Deal back in the 1930s. ‘Government by organized money was,’ he said, ‘just as dangerous as Government by organized mob.’ Today it is far more dangerous.
Those various components of organized money are mostly led by the products of business school education. Continue reading Sustainable Management Education
GDP is a hugely misleading measure of economic wellbeing. It includes items which are actually destructive of the real economy on which most people’s wellbeing depends. Not only that, but most of it is actually immeasurable.
They used to measure progress by GNP which tried to measure nationally owned economic activity, no matter where it took place. But as successive governments presided over the disposal of UK owned assets to foreign corporates and governments, GNP reported the post-industrial economies as shrinking. Self-interested politicians found GDP a more convenient measure, since it ignored that massive fire sale and provided short term breathing space. So, despite the long term damage done to the real economy, those disposals, nominated as foreign direct investment, were actually celebrated in the UK as demonstrating it as ‘open for business’.
That fits nicely with the Milton Friedman version of the free market open access ideology that took command of Anglo-American politics since the days of Thatcher and Reagan. Initially, that perspective included an acknowledgement of the theoretical importance of the quantity of money circulating in the economy. That quantity would determine the rate of inflation as well as the growth of the economy. Politicians tried it and it failed, to such an extent that even Friedman himself confessed disappointment.
Continue reading GDP, Austerity and Wellbeing
Education is what really matters. Who could possibly disagree?
The globalised economy has moved jobs from the G7 industrialised economies (in alphabetic order: Canada, France, Germany, Italy, Japan, UK and US) to the newly industrialised BRICS economies (Brazil, Russia, India, China and South Africa) which account for half the world’s population. The simple and obvious reason for job migration was initially because labour costs were so much lower in the BRICS economies. But their manufacturing experience has provided a foundation for their future economic development; they now offer much more than simply cheap labour.
President Chump promises to bring those jobs back to America, but he’s going to struggle. The G7 economies will not be competitive at the low end of economic activity, unless and until they fall much further back into the doldrums. G7 success will depend on developing in the high tec, innovative segments of new industries. And to do that, they must lead the world with their educational systems.
Continue reading Education, Education, Education
Tony Judt opened ‘Ill Fares the Land’, his valedictory ‘treatise on our present discontents’, suggesting that something was ‘profoundly wrong with the way we live today.’ Since the 1980s we have relied on the free market to maximise monetary wealth and to distribute it with fairness and justice. But it clearly hasn’t worked.
We have been here before. The 1929 Wall Street Crash and the following austerity driven Great Depression, which Roosevelt ended with New Deal investment, has many parallels with today’s situation. The same forces that fostered the prolonged Great Depression are now heading the world to destruction. But today’s global population, which has more than tripled since the 1930s, is not just afflicted by rising and unsustainable inequalities of wealth and income, but also earth’s oceans and atmosphere polluted, its finite resources wasted, its biological species headed for a mass extinction, and these impacts capped by the seeming inevitability of global warming.
Business, if appropriately managed and governed, may have the potential to resolve all these issues by the invention and application of new technologies. No alternative solution appears to have a like chance of success. Business historian Chandler described business as the most important institution in the economy and its managers the most influential. Business controls the real industrial economy. It controls finance. It controls the media. It is hugely influential in academia through its funding of research and academic institutions as well as individual appointments. It also, increasingly, appears to control political decision making through its $multi-billion funded lobbying industry, its politically oriented think-tanks and its operation of the revolving doors through which individuals progress between these various sectors and government. Just about the only thing business does not control is business itself.
Continue reading Sustainable Business
In Anglo-America and like economies, mature businesses are mostly driven according to Friedman’s command, to make as much money as possible for stockholders. The underlying ideology, which is generally accepted as the way the world works, holds that the free market is the most effective decision maker regarding the allocation of economic resources. Therefore both taxation and regulation should be cut to a minimum since they only distort the market’s most efficient allocations. The ideology also holds, according to Friedman, that the private sector of the economy is twice as efficient as the public sector, which should therefore be privatised wherever possible. Just those two strands of the ruling ideology, combined with a business sector which complies with Friedman’s injunction to maximise shareholder money, is heading the world down the road to Armageddon, a dictionary definition of which is ‘the site of the last decisive battle between the forces of good and evil.’
That dichotomy between good and evil might be very apparent if the ideology was given 100% implementation. Such would involve absolutely no regulation, no taxation and a private sector which was running all public services, as well as business operations, for the sole purpose of maximising shareholder wealth. That at least makes absolutely clear, the direction of travel we are currently taking.
Continue reading The Road to Armageddon
The shocks and discontinuities impacting the global economy have led governments to seek ‘business as usual’ as the ultimate desirable state. However, they appear not to recognise that business is not a coherent singularity, but a mess of virtue and vice. Fragile start-ups, innovative fast growing SMEs, and predatory extractors of value for the benefit of “investors”, are all classed as businesses. Few politicians have any direct experience of the virtuous categories, though some have made substantial gains from the vice.
Governments need to diagnose and be specific about what categories they are referring to, before offering their so-called ‘business friendly’ prescriptions. Light regulation may benefit the innovative SMEs earning their keep in highly competitive markets. But that same light regulation, if applied generally, will encourage the monopolistic leviathans to use their market power to exploit their customers and all other stakeholders for the sole benefit of shareholders. That predatory action has a negative impact on the real economy and is damaging the common good.
This is not solely the result of actions by powerful but corrupted individuals. There is a natural evolutionary process leading business along those tracks unless constrained by relevant regulation to prevent monopolistic market abuse.
Continue reading Business as Usual