July 2008

I have just read an interesting article on Economist about Cherry Picking, which is a strategy used by consumers as well as companies for different purposes. The very act of cherry picking, this mecanisme, favors the evolution of businesses and societies at large. And evolution is a history of the survivors.

“It refers, for example, to customers who ignore products that are bundled together by a manufacturer (who in the process may disguise cross-subsidies between high-margin and low-margin components of the bundle). ” This is the cherry picking of the consumers. The objective of the cherrypicking consumer, in the end, is to find a bundle of products at the lowest price with the highest quality. It makes manufacturers to compete over quality as well price, creating a competitive market. Only the fittest manufacturers will survive the tests of consumers. Thus the evolutionary power of this strategy over corporations.

In a similar way, corporations can also pick customers. New comers in an established industry can sometimes cherry pick their way to success.  “The term cherry-picking is also applied to the behaviour of new entrants into old industries, firms which try to choose their customers carefully. By calculating which consumers are profitable (and appealing to them while ignoring those who are not) such a firm can sometimes rapidly gain market share.” “In car insurance, for example, cherry-picking in the UK pushed up the price prohibitively for young male drivers, the highest-risk group.” This is a typical evolutionary force at work where cherry picking has put young male drivers out of the race… In a way, I begin to understand why French banks prefer to lend to clients with little financial dynamisme. They are also cherry picking their customers. Those with little financial knowledge could accept offers with more margin, they may also be reluctant to move from status quo, say repaying a 25-year mortgage. While financial savys are smart enough to avoid traps and moves fast when opportunities occur, like interest rate moves lower, huge equity market opportunities in emerging countries, things like that. They are also less likely to be attracted by bland, non performing funds proposed by the bank. It is the same principle with the global free cash flowing around the world finding a place to invest. They seek profits. Yet as soon as the macroeconomic contexts are gone, they are gone, leaving behind projects suspended and stock markets in panic. From a broader view, these are all cherry-picking behaviour. Banks select customers, cash select investments, logic. All these contribute the evolution of … economics. ( like proposed by the Mckinsey book “Origin of Wealth”)

Further reflection of cherry picking connect me to another article on Captital on Dartybox, which is said to be a failure because of the fierce competition on the ISP market in France. Obviously Darty tries to cherry pick its customers, with a failure. The strategy is a good one in that it is a good way to crack an established market, yet their problem is that their target customer is not very well defined, so they find themselves eating a little part of the cake of everybody, not enough to retribute the investments.

Last word about evolution and competition: the survivorship bias, which is also mentioned by the economist article. It probably means, history is defined by the winners. Yes, indeed it is. The winners can define history, because, by all means their is no loser around the contest the truth.

I have seen the economist debate on the permanent declining competitiveness of workers of rich countries. It is quite interesting. Overall, I quite agree with statements of Lynda Gratton, Professor of Management practice at LBS, the CON side. But overall, I think she is idealistic in assuming a world without boundaries.

The three points: rich countries can be viewed in isolation, performance of workers across a country or region is the same, and finally about the value of teams over individual heroisme of workers as the driving force of competitiveness are in fact all based on the assumption that the world is frictionless, in different domains.

The first point is that countries can not be viewd in isolation, they must join up, yet political struggles are fierce nowadays, international organizations are at a loss on how to run the world with the ever more powerful China, India and gulf states. Trade barriers and government subsidies exist in countries for goods ranging from food to oil. Nationalisme and proctectionisme are rampant all around the world.  In a world fraught with frictions and the notion of a nation, the rich countries can be viewed in isolation.  After all the multinationals have national origins. The idea of producing multinationals to conquer the world is a 20th century equivalent to producing armies to rule the world. (Too radical) The political frictionless world is far from reality.

The second point of performance of workers around the world is converging, true… Yet as long as there are country borders, there are administrative barriers, the costs of these workers will not converge to a single point. The competitiveness is the ratio of performance and cost. The economic frictionless world is barely the case.

The The final point about the value of team over individuals is true and the frictionless paradigm worldwide cooperation works in is the internet and web 2.0. The free flow of capital, goods and people is far a perfect equilibrium. The information frictionless world is more or less true.

Of the assumptions that the three points she makes, only the last one with the internet is true. Yet overall I like her bold idealisme because she really puts out an enchanting blueprint for the world. In her rebuttal statement, she stated “We live in a joined-up world with global systems of climate and demography. ”  Challenges that mankind faces can only be solved with joined up efforts, we should behave with good will and cooperation rather than mean-spirited fear and rage.

In my view, the trends of the world are the following:

  • The world is the transition from one previous equilibrium state(US Soviet bipolar situation) to a future equilibrium state(a joined up world as Mr. Gratton proposes).
  • During this stage political strifes will give way to common causes like energy crisis, global warming and meteorological disasters.
  • Technology transfers in all domains, especially in energy efficiecy and production, CO2 reduction measures,will be blessed by governments. 
  • Trade barriers will disappear and free market will prevail. 
  • Informational technology will be invincible and will tremendously aid developing countries to boost economic growth. Worldwide cooperation among professionals will be more widespread. 

The start of my reflections is the good old physics law learnt in the middle school: the energy conservation law, which postulates that energy can not evaporate nor be generated from no where. Physical actions only transforms energy from one form to another. Though I am not sure if it stills holds true in the light of modern advances in quantum physics, in my view, on the macro level, it is still of a truth considering the human beings in the equation. 

So on the left of the equation, we have only one energy source in this solar system: the sun, it is the energy source of everything, from rocks to trees to animals. On the right we have all the energy entities: rocks, trees and animals and human beings. From the birth of the race of human, we are constantly trying to transform the energy trapped in other beings: trees and animals into energy of our own. First by inventing tools like arches and spears to aid us in our hunting, then by inventing machines running on coal and oil to create electricity, the life blood of modern society. Looking at the human history, we find more and more advanced mecanismes to suck energy out of nature. And human appetite for energy increases exponentially with the pace of the advancement of the civilization. It is really increasing in that our computers, our televisions, our ipods, our pdas are consuming huge amounts of energy collectively, yet they are leaving not much after them. If we compare the energy footprint of a citizen of Western civilization with that of an emerging economy, we might have 10 fold differences. And the worst thing, or the best thing is, emerging country citizens are catching up… So we are potentially expecting 10 billion souls using energy at the rate of Western citizens… a horror! No wonder the world is desperately scrambling for alternative energy sources. Yet the left of the equation has never changed, the source of energy is always the SUN. The solar flux reaching the earth is about 1000W/m2. Taking the current energy efficiency of solar panels of 10% and the world land area of 148.94 million km2.  That would be 14.894 trillion KW. That means if we cover all the land of the earth with our current inefficient solar panel, we could have a generating capacity of 14.894 trillion KWH/3 =4.964 trillion KWh , because not all the land is lighted at the same time.  The 2007 electricity consumption of United States only, according to the CIA World Fact Book, is  3.816 trillion kWh. I like this kind of number work, here is an example.  What is sustaining the world economy now is in fact the millions of years of sunlight the earth has enjoyed before the advent of human kind. The energy is trapped in the crude oil, in uranium, in coal etc. From the above calculation, human development is simply not sustainable.

And what if the earth can not sustain this huge population with unprecedeted quality of life? Huge declines in population by natural disaster? Armageddon? Nature takes its revenge.

We are in a great age with many changes. We are faced with quadrupling oil prices and ever increasing commodity prices, strong recessions in United States and hot emerging economies in Middle East, Asia and Latin America. It seems the world order is beginning to change. There are at least the following processes that are going on.

  • Sustaining high oil prices and insatiable oil and commodities needs of emerging economies will inevitably lead industries to alternative energy and food sources, thus creating new industry leaders while crushing old ones like Ford, GM.
  • The oil economy is on the demise, new unpredictable energy source is on the way to glory. It might well be that there will be no dominant force, much like the world’s multilateral politics today. The future is hybrid.
  • The euro is becoming stronger and stronger, with a potential to replace the dollar as a world currency. Much of the emphasis of the rate hike of ECB is in the maintenance of a strong euro to combat inflation so that oil and foods remain affordable for Europeans.
  • The emerging economy is striving to ascend up to the living standards of the few hundred million souls in the West, in which process, a degradation of Western living standards might be under way. In my view, this whole process is a redistribution of wealth among nations. Living standards of West and East will inevitably converge.

And with all these radical changes and problems on the development, the international organizations are also experiencing a difficult time: tie or die. The G8 meeting a an example how useless the discussions and the decisions are regarded by the world community in the face of oil shock, rising food price and the credit crunch. The organization needs serious restructuring or it will die, as posed by the economist.