Tuesday, February 14, 2017

Human vs. Machine

A list of human vs. machine competitions since 1979 showcasing how machines are performing successfully and winning at various tasks that humans have excelled in or have been naturally gifted to do. Complete blog here.

Superstar Formation and Sustainability

The second article in the September 17th, 2016 Special Report "Companies" in The Economist is "Why giants thrive".

"Pankaj Ghemawat, of the Stern School of Business at New York University and the IESE Business School at Navarra, Spain, calculates that America’s top 1,000 public companies now derive 40% of their revenue from alliances, compared with just 1% in 1980."

"It found that last year those that deployed 60% or more of their R&D spending abroad enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented competitors."

The article gives reasons for the continued growth of the Superstar companies though when it is gives the example of Amazon, I have to take exception to the various aspects attributed to the rest of the Superstars. Amazon has grown ideas from within that both created a trend and captured it (one click ordering and shipping, Echo, etc.), discovered the emergence of a trend and cornered that market (Amazon Web Services, small niche businesses will need eCommerce outlets, etc.) and finally this is a significant one, reinventing a market place that was considered to already see heights of innovation and productivity (logistics, supply chain, etc.).
In comparison, Google is starting to look like "I can do that too". It has copied Amazon's Echo, Apple TV and the Smartphone. Google does create solutions to Grand Challenges, as I call them, or should they be called Grand Automation, such as the self driving car - something one cannot and should not expect from the likes of the Detroit car families.

A key insight from the article is, "Most of the new tech firms are “platforms” that connect different groups of people and allow them to engage in mutually beneficial exchanges."

Though nothing lasts forever in the future of economics:

"The superstar companies, then, seem to have all the advantages. But two arguments are being advanced to suggest that their success may not last. One is that the forces speeding up creation, which currently work in their favour, could also speed up destruction. The other, more fundamental one is that these companies are merely holdouts against a general trend towards a more fluid economy."

Enjoy the complete article here.

Tuesday, February 7, 2017

Superstar companies

Following are comments to and excerpts from articles published in The Economist's Special Report "Companies" on September 17th, 2016.

The first article in this report "The rise of the superstars" explains what a superstar is, why today it has started to matter again and the age of entrepreneurism is at an end. I have rather an orthogonal viewpoint as an entrepreneur can find value creation opportunities in any economic circumstance.

The article starts and ends with the age old question asked since Roman times and superbly articulated by President Theodore Rosvelt:

"On August 31st 1910 Theodore Roosevelt delivered a fiery speech in Osawatomie, Kansas. The former president celebrated America’s extraordinary new commercial power but also gave warning that America’s industrial economy had been taken over by a handful of corporate giants that were generating unparalleled wealth for a small number of people and exercising growing control over American politics. Roosevelt cautioned that a country founded on the principle of equality of opportunity was in danger of becoming a land of corporate privilege, and pledged to do whatever he could to bring the new giants under control."

Though his aspirations may not have found culmination:

"But now size seems to matter again. The McKinsey Global Institute, the consultancy’s research arm, calculates that 10% of the world’s public companies generate 80% of all profits. Firms with more than $1 billion in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation."

This is both positive and negative:

"The number of listed companies in America nearly halved between 1997 and 2013, from 6,797 to 3,485, according to Gustavo Grullon of Rice University and two colleagues, reflecting the trend towards consolidation and growing size. Sales by the median listed public company are almost three times as big as they were 20 years ago. Profit margins have increased in direct proportion to the concentration of the market."

Positive because this is unsustainable for innovation - large companies do not deliver breakthrough innovation - their purpose is to be incrementalists - and the consumer and commercial markets have leaps in growth only when disruptions come along. Unfortunately, this trend's negativity squarely hits the entrepreneur head on:

"Startups, meanwhile, have found it harder to get off the ground. Robert Litan, of the Council on Foreign Relations, and Ian Hathaway, of the Brookings Institution, note that the number of startups is lower than at any time since the late 1970s, and that more companies die than are born, pushing up their average age."

The article quotes Mr. Peter Thiel, "Competition is for losers." Read Mr. Thiel's article in the Wall Street Journal here in which he elaborates on the concept of, "If you want to create and capture lasting value, look to build a monopoly." Interesting fact that "In a list of the world’s top 100 companies by market capitalisation compiled by PwC, an accountancy firm, the number of continental European firms has declined from 19 in 2009 to 17 now. Still, in most of the world some consolidation is the rule. The OECD, a club of mostly rich countries, notes that firms with more than 250 employees account for the biggest share of value added in every country it monitors."

The conclusion in the article is stark and perhaps has opportunities for the astute capitalist entrepreneur who knows that the multinationals growth has nothing to do with innovating but with the application of innovation and he or she can deliver it for them, "There are good reasons for thinking that the superstar effect will gather strength. Big and powerful companies force their rivals to bulk up in order to compete with them. They also oblige large numbers of lawyers, consultancies and other professional-services firms to become global to supply their needs. Digitisation reinforces the trend because digital companies can exploit network effects and operate across borders."

Silicon Valley continues to grow its superstars via M&A. It is fascinating to see how many small and entrepreneurial companies are being bought by the likes of Intel, Cisco, Facebook, Google, Oracle, etc. Though I find it rather interesting that Amazon continues to grow its own ideas starting from within the corporation!

Enjoy this first article in the special report here.