Bhide's New Book: The Venturesome Economy

I've been reading an advanced copy of Amar Bhide's new book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. I must say that it is a thought-provoking manuscript that challenges much of the conventional wisdom about globalization and innovation. Bhide approaches the issue of globalization and innovation from a slightly different perspective than many other scholars, journalists, and pundits. For many years, Bhide has studied entrepreneurship. Thus, he approaches the issue of globalization and innovation by studying venture capital-backed businesses.

Bhide's main propositions are sure to prompt reaction and dissent from some quarters, but I find it refreshing to see him so eloquently argue that the United States and other western industrialized nations need not fear globalization. Here are a few of Bhide's propositions:

• "A nation's venturesome consumption - the willingness and ability of intermediate players and individual consumers to take a chance on and effectively use new know-how and products - is at least as important as, if not more important than, its capacity to undertake high-level research."
• "An increase in the world's supply of high-level know-how provides more raw material for mid-and ground-level innovations that increase living standards in the United States."
• "Techno-nationalist prescriptions to protect the U.S. lead in high-level know-how may do more harm than good by impairing the performance of the other players in the innovation game who use high-level know-how."
• Perhaps most importantly, Bhide argues that, "The development of scientific knowledge or cutting-edge technology is not a zero-sum game."

What makes the book fascinating to me is that Bhide approaches the issues of globalization and innovation from a very different perspective than traditional economists. As a business school professor, Bhide examines how venture capital-backed enterprises function. He's looking at the reality of young, innovative companies, rather than studying abstract conceptual models of the economy that are often based on assumptions that may not line up with reality. While economists clearly have much to offer to this debate about globalization, Bhide brings a new vantage point to the table. His book surely informs us in new ways, and it is certain to make us reconsider many of the key arguments being made in the popular press about globalization.

Slashing Prices on Blu-Ray Players

The Wall Street Journal has an article today about retailers slashing prices on Blu-Ray DVD players. The article is interesting, because it suggests that the retailers are not simply cutting price because of the down economy. They also are doing so because of fears of the oncoming move to digital downloads. They are trying to encourage adoption of the players, and thereby substantial purchases of Blu-Ray DVDs, before consumers begin to adopt video-on-demand and digital movie downloads in far greater numbers. In a sense, we have a race going on, with firms trying to make sure that we move from regular DVDs to Blu-Ray and then on to digital downloads in that order... the worry is that consumers might just leapfrog Blu-Ray, moving directly from normal DVDs to digital downloads and video-on-demand. The other major challenge in this market is that we may not have enough of a technological advantage to justify, in consumer's minds, making the upgrade to Blu-Ray... especially given the large inventory of normal DVDs that customers have in their homes.

GM and Chrysler - Merger, Government Intervention, or Bankruptcy

The Wall Street Journal has a front page story this morning outlining three possible options for General Motors and Chrysler: merger, government intervention, or bankruptcy. Some combination of the first two is also apparently an option. I understand the rationale for a merger, but I have my doubts. The potential for massive cost reduction synergies does exist here, but the key question is this: Can the two firms actually realize these synergies quickly enough to save the companies from bankruptcy? How complicated will the merger be, and does the complexity of integration take the firms' eyeballs off of actually running the business and trying to improve customer satisfaction? Merging two sick giants is not the typical path to success. As an investor, I would be very cautious about believing in the rapid synergy arguments that executives are likely to put forth as a rationale for the merger. For a cautionary tale, we need only look at the disastrous results for shareholders a decade ago when Daimler acquired Chrsyler.

Learning from Success and Failure

Many companies are conducting post-mortems these days. They are reviewing their failures, asking what went wrong, and trying to come up with corrective actions for the future. However, firms should remember that comparison helps to protect against spurious conclusions. When we study a single project, it becomes rather easy to jump to conclusions as to what factors contributed to that outcome. However, we may not have identified the correct cause-effect relationship; we can easiliy attribute a failure to the wrong causes and factors.

Research suggests that we learn more effectively if we compare successes and failures, rather than only examining our failures. Consider the work of Tel Aviv University scholars Schmuel Ellis and Inbar Davidi, who examined after-event reviews conducted by the Israeli military. They compared soldiers who conducted after-event reviews after successful and unsuccessful navigation exercises with soldiers who only reviewed failures. Ellis and Davidi found that soldiers who studied successes and failures performed better on subsequent missions than those who only studied failures. The two scholars argued that “contemplation of successful events stimulated the learners to generate more hypotheses about their performance.”

The implication is that, as firms study their failures these days, they should be systematically comparing the failures to past successes. Comparison and contrast will protect against spurious conclusions, and it will help refine their lessons learned.

The Balance Sheet as a Competitive Weapon

In finance, people talk about the "optimal" capital structure of the firm, i.e. the appropriate balance of debt and equity so as to minimize the cost of capital and maximize the value of the firm. However, some companies choose to maintain much less debt than they could afford to carry on their balance sheet. In fact, some firms not only carry little debt, but they maintain a hefty amount of excess cash as well. During good times, some investors dislike all that excess cash on a firm's balance sheet; they cite the opportunity cost, and they sometimes demand that the firm distribute the cash to shareholders through stock buybacks or dividends (sometimes because of fear that the management might squander the resources in pursuit of flawed diversification strategies or other ill-advised expansions).

Balanced against the opportunity cost, what does this conservatism get you, besides protection against financial distress during economic downturns? Most importantly, a strong balance sheet (low debt, excess cash) can become a competitive weapon for a firm. When other firms face distress, a company with a strong balance sheet can go on the offensive and put additional pressure on competitors. How can they do so? They might launch a price war, using the additional financial resources and flexibility to fund the discounting. That effort may enable the firm to increase market share in a downturn. They might also use the strong balance sheet to gobble up weaker competitors through mergers and acquisitions. Finally, they might use the resources to accelerate key investments in equipment, factories, R&D, and the like - investments that they know their rivals might not be able to match during the downturn.

Take the example of Wal-Mart in recent weeks. They just announced that they will be offering steep discounts on certain toys this holiday season. It appears that they are using their financial strength to try to increase market share at the expense of weaker rivals in the retail sector. Similarly, consider the examples of Wells Fargo and Bank of America in the financial sector. They appear to be using their strong balance sheets to make opportunistic acquisitions of weaker rivals during the financial crisis. These competitive moves would not have been possible without the flexibility provided by a strong balance sheet.

Cutting Costs

The Wall Street Journal has an interesting article today on how small businesses are finding ways to cut costs given the economic downturn. The article highlights some ways to reduce expenditures without cutting employees or service to customers.

In general, the philosophy that small businesses (actually all firms) should take in an economic downturn is that, "There is no such thing as fixed costs." In other words, businesses have to focus on overhead costs when volume plummets in an economic downturn. They must scale those down; otherwise, the average costs per unit will skyrocket as volume falls. Some good categories to focus on are energy, supplies, rent, and leases.

Will the Green Movement Become a Victim of the Global Financial Crisis?

The Dow ended down 369 points today, after having been down 800 points earlier in the day. The Dow finished below 10,000 for the first time in years on worries that the financial mess is spreading quickly to various international markets. With the global financial crisis deepening, one wonders about the impact on various companies. Today, I began wondering about the green movement. For the past few years, we have seen companies trying to become more environmentally conscious. Many firms tried to reduce their carbon footprint. You have to wonder, however, whether these firms will cut back on their environmental programs given the tough economic climate. Yes, some pro-environment moves by firms actually reduce their costs. However, other initiatives cost money in the short run, even if they do pay off over the long haul. Will firms scale back their environmental iniatives to try to preserve cash and bolster their financial position in this difficult economic environment? I think they will. It will be interesting to watch these developments.

Harley Davidson Advertising

I've always admired Harley Davidson's advertising, because it is so well-designed to represent the core values of the brand. Their latest print ad didn't let me down. It's an ingenuous ad, in that it BOTH stays consistent with the brand's core values, AND it lets the customer know that a Harley happens to get 50+ miles per gallon. Check out the ad below: