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Showing posts with label EBAY. Show all posts
Showing posts with label EBAY. Show all posts

Saturday, 21 January 2012

The natural evolution of markets

THINK ASIAN By ANDREW SHANG 

 

Market change: A general view of ebay headquarters in San Jose, California. Websites like ebay and Alibaba has eliminated geographical space by allowing transactions in rural markets to be done online. —Reuters
Man is a social animal. The 19th century sociologist and philosopher Georg Simmel argued that trade and exchange is “one of the purest and most primitive forms of human socialisation.” Last month, while travelling through remote parts of West Timor, in Indonesia, I was able to study first-hand how rural markets operate. I could not help wondering why so-called primitive markets such as these work so well when complex financial markets can be so dysfunctional?

Rural markets in East Timor are wonders of trade. Men and women in tribal costume converge on different villages on different days of the week. Everyone knows when to go to which village for these markets, which typically start at dawn when produce is fresh and often finish by 11am. Economists would surely call this scene of bustling rural commerce a “concentration of liquidity.”

As the late Stanford economist John McMillan argued, the market is a human construction- a tool. The market has features to make it work smoothly: mechanisms to organise buying and selling; channels for information flow; laws that define property rights, and self-regulating rules that govern behaviour.

Most rural markets are much more complex than they appear. They sell everything needed for daily life and have their own hierarchies. The stalls of wealthier, established traders are sheltered and in the best locations, while poorer traders just spread their wares on the ground. Specialisation is evident even in this basic setting there are designated places to buy textiles, fresh meat or fish, vegetables or household goods. These markets also function efficiently as information exchanges. Prices differ depending on who you are and what you know. Tourists pay more because they do not know the local language or rules, while locals bargain vigorously.

In these basic markets, you can observe the entire range of business evolution, from simple production, to wholesaling to final sale. Everything is designed for convenience and to reduce transaction costs. For instance, there are no roadside petrol pumps. Instead, petrol is sold in small bottles because the most common transport are motorbike taxis that carry as many as three passengers plus the occasional chicken or bag of rice.

The permeation of technologies like mobile phones and the internet even into these remote rural areas has accelerated the speed at which information travels through these markets. This means even lower transaction costs between business, between consumers, and from businesses to consumers. In some instances, use of websites like eBay and Alibaba have eliminated geographical space by allowing transactions in such markets to be done online.

With technology ending the isolation of rural markets and linking them to global markets, the production and marketing game is changing beyond recognition. A similar phenomenon occurred in the airline industry. Budget airlines use the internet to sell forward excess capacity at below average cost, thus filling their planes to capacity and maximising profits. This created a new market because before, many people could not afford to fly.

You see the effect of high transportation costs clearly in rural markets. Here, locally produced goods are ludicrously cheap, but imported good are very expensive.

The study of modern, sophisticated supply chains enables us to appreciate the fact that producers do not necessarily make most of their money in the product-to-consumer chain. The rule of thumb is that if a product costs US$1 to make, the distribution and transportation costs may account for US$3 of the US$4 final sale price to the consumer. Common conceptions of innovation still focus largely on creating new products, whereas services or process innovation are probably much more profitable and add more value than is generally understood.

To illustrate, the global trade regime still has a “hardware” focus, concentrating on physical trade rather than the more complex and less measured services trade. Apple innovated not in manufacturing, but in design and lifestyle. This means that it can sell a product at much higher prices than its competitors. Once it has captured a market, value creation comes from downloading new apps for the iPhone and iPad.

Financial services have emerged as one of the most profitable businesses, certainly until the last financial crisis. For a time before the 2007 crisis, the turn on capital in the financial sector was 20% per annum, significantly higher than for manufacturing and other real sector businesses.

With the benefit of hindsight, we now know there were two major reasons for the large profits in finance. The first is that the physical cost of creation of a financial derivative is almost zero, as it is an abstract product of its creator's imagination. For many, the reason to buy a derivative is to hedge and reduce risk. If a buyer believes that the hedge is useful, which it can be under specific circumstances then he or she will be willing to pay a premium for that hedge. A second reason is leverage. The greater the leverage, the larger the profits are for both lender and borrower. But there is a catch it adds systemic risk to the entire market and can be fatal to the over-leveraged borrower.

The FX Accummulator is a good example. It is a financial product that looks and feels like a wonderful foreign exchange hedge that yields good profits for the speculator. However, many were not aware that at certain price levels, the amount of margin called by the lender could be greater than the total assets held by the speculator. Thus, what appears to be a “safe” hedge can turn out to be toxic, particularly when markets are volatile.

This raises the question whether financial markets have evolved beyond the limits of social safety. University of Southampton Professor Richard Werner is one of the first to point out that there are two aspects of credit creation one that contributes to real value creation and one that does not. Financial markets have evolved into highly complex systems that consumers, financial experts or regulators do not fully understand. Increasingly, they contribute less to social utility and become systemically fragile.

As McMillan presciently pointed out, “markets are not miraculous. There are problems they cannot address. Left to themselves, markets can fail. Viewed as tools, markets need be neither revered nor reviled just allowed to operate where they are useful.”

Rural markets arise from communities that have organised their commerce in such a way that reinforces social utility and stability. The Holy Grail of financial theory and practice in the world's advanced economies is to identify at what level of complexity financial markets exceed the limits of social stability.

Andrew Sheng is President of Fung Global Institute.

Saturday, 1 October 2011

CEO, the Least Popular Job in Silicon Valley





Potential CEOs are opting for quicker dollars at startups and investment firms

 
Illustration by Sophia Martineck
By

Dave DeWalt is known within Silicon Valley for his technical chops, his charisma, and his business accomplishments, which include reinvigorating security software maker McAfee and selling it to Intel (INTC) in 2010 for $7.7 billion. At 47, he now has bigger ambitions. “Running a big-cap company is considered the crowning achievement in many people’s careers, and I feel that way as well,” says DeWalt.

Such talk makes DeWalt an anomaly. In tech circles, the C-suite at a publicly traded company is no longer the be-all and end-all. Just look at the troubles Yahoo! (YHOO) and Hewlett-Packard (HPQ) have recently had finding new leaders. HP canned former SAP (SAP) Chief Executive Officer Léo Apotheker after just 11 months—then faced a barrage of criticism for replacing him with HP director and former EBay (EBAY) CEO Meg Whitman without bothering to look beyond its own boardroom.

Industry consolidation has created a small number of very large technology companies such as HP, Cisco (CSCO), and Microsoft (MSFT). They’ve stumbled in recent years as disruptive developments like the mobile revolution and the dash to the cloud shake the entire sector. As the job of leading these companies gets tougher, there are fewer talented leaders with the skills—and inclination—to do it. Rather than wait for high-profile CEOs such as Cisco’s John Chambers, Microsoft’s Steve Ballmer, and Research In Motion’s (RIMM) Mike Lazaridis and Jim Balsillie to step down, many potential replacements have decamped for more exciting, and potentially more lucrative, gigs at startups or as investors. “This is the first time in tech history that you have this many companies with CEOs approaching 60 that don’t have any obvious successors,” says John Thompson, vice-chairman of recruiting firm Heidrick & Struggles (HSII).



Consider Cisco. With 62-year-old Chambers now in his 16th year as CEO, many of his most capable lieutenants have given up waiting for their chance to succeed him. The list of departures since 2007 includes former Chief Development Officer Charles Giancarlo (now a private equity partner at Silver Lake), longtime general manager Tony Bates (who jumped to Skype just before it was purchased by Microsoft in May), and former head of the data center business Jayshree Ullal (now CEO of Arista Networks). While the accomplishments of Chambers and other longtime CEOs including Ballmer are undeniable, their long tenure has sapped the strength of the back bench, says Heidrick’s Thompson. Now a common belief is that both companies will need to go outside for their next CEO—not an easy task when the competition for talent includes hot pre-IPO companies such as Facebook. “The people who could possibly do these jobs realize it would be easier to create a new company rather than try to get an old stodgy one to adopt new ideas,” says Trip Hawkins, CEO of game developer Digital Chocolate.

Boards of directors get low marks on recruitment and retention, too. Few give much attention to succession planning until crisis hits, says Jeffrey A. Sonnenfeld, senior associate dean of the Yale University School of Management. New hires such as Bartz and Apotheker are set up for failure as boards prioritize near-term earnings over long-term risk-taking. “We’ve been weeding the qualified people out of the system for the past 15 years,” says Roger McNamee, a longtime technology investor and co-founder of private equity firm Elevation Partners.

Nor have tech companies excelled at developing CEOs. Once executives prove themselves in a given area—say, software engineering—they rarely go through General Electric (GE) -style development programs to get exposure to a business’s full breadth. There are exceptions: Intel and IBM (IBM) are both organized so that top executives get to run multibillion-dollar business units. IBM Senior Vice-President Michael E. Daniels, for instance, runs the $56 billion services business. At Intel, young executives have an apprentice system where they shadow top executives (current CEO Paul S. Otellini spent years carrying Andy Grove’s bags). As a result, both companies have succeeded at finding internal candidates for the top job. But this is not the norm in Silicon Valley, where most companies are organized along strictly functional lines such as marketing. “The tech industry is great at producing technology, but it’s not producing leaders,” says Rosabeth Moss Kanter, a professor of administration at Harvard.

To break the cycle, some tech industry veterans say it’s time for a new approach to choosing CEOs. Forget the old idea of finding an older, well-known operations or sales executive to maximize earnings and soothe nervous shareholders. Too often, those experiments—Dell’s (DELL) Kevin Rollins, Apple’s (AAPL) John Sculley, Yahoo’s Carol Bartz—have failed, says McNamee. Now Old Guard tech companies need to find risk-takers willing to bet big on new visions. That’s hard enough for entrepreneurs such as Amazon.com’s (AMZN) Jeff Bezos. It may be even harder at companies settling into middle age.“Somebody is going to have to take some risks, and bring in younger CEOs for a while,” says McNamee.

To find them, some boards are taking a larger role in succession planning. Egon Zehnder International has been testing a new approach for two years, in which board members use a number of techniques such as mentorship programs to groom internal candidates, says Karena Strella, managing director of the firm’s U.S. unit. The goal is to take some focus off past accomplishments and identify impassioned, adaptable people. Then it’s up to the board to back them, says Thompson. “People forget that it took Steve Jobs seven years to really move the needle at Apple,” he says. “If you used that standard today, he would have been fired long ago.”

The bottom line: Shortsighted boards and the long tenure of some CEOs have led to a succession crisis at big-cap tech companies.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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