Right at the beginning of most John Grisham books, a person appears who is confronted with circumstances which completely disrupt his happy life. Sometimes this is mainly bad luck, but often serious injustice is done. And then the person starts to fight the injustice, making the story a bestselling one. As an economist, I like that; high sales are good for the economy, and for employment too. Yes, injustice brings many good things – thanks to the hero who fights it of course.
Grisham is an open-minded man, but as a writer he refuses to have any discussions with the characters in his book. He simply does not listen to them. That’s good, because his heroes would tell him injustice should never be tolerated. This is how real heroes think. So if Grisham did what his heroes wanted, there wouldn’t be any injustice at all in his books – not even at the beginning. That would damage book sales. So Grisham is doing the right thing, in my view.
During the round of 16 match between England and Germany at the 2010 World Cup in South-Africa, the referee did not award a goal when Frank Lampard’s shot crossed the line. And so England lost. Yes, great injustice was done! In the media, many well-known players and coaches protested and pleaded for goal-line technology to assist the referee in such cases of doubt. Good. Our football heroes are examples for people all over the world, and they should make it clear that fairness is good.
But players and coaches are no more than characters in the book called ‘Football’. The author of that book is FIFA. This author has, unlike John Grisham, recently listened to the characters in its book. And so the present World Cup has goal-line technology, which will make the game more just, but arguably less exciting to watch.
Of course, FIFA president Blatter can argue he is not only a writer, but also a character in the book called ‘Football’ – so he should set a good example for children too. And children will understand that the new technology is fair. But if this is Blatter’s argument, why is FIFA itself so corrupt? Why does it let big sponsors make money while the poor in Brazil suffer as a result? What kind of examples are these? If FIFA really wanted to fight injustice, video replay for referees should not have been its first priority.
Anyway, we have to face it: technology has become part of the game. But I still remember that match between England and West-Germany in 1970, at the World Cup in Mexico. The match was thrilling even before it started, as the Germans wanted revenge for that highly debatable English goal at the World Cup final at Wembley four years before. Hopefully, England will meet the Germans during the elimination stages of the current World Cup, in Brazil. If so, everyone should watch that one special game. It will be the first World Cup in which footballing heroes can expect real justice in undoing the injustices of the past. Now all England needs is for Lampard to score that same goal again!
Last week we looked at sources of finance. This week we’re taking a look at how the money is used.
Where the money is invested
The equity and debt come into the company as cash. Managers spend this on, for example, raw materials, labor and expenses in the case of a manufacturer, or mainly on labor in a service business. We will use the manufacturing business as our example since it is easier to visualise the process round the business model.
The combined inputs of material, labor and expenses produce an inventory of finished goods. These are sold to customers for either cash or credit. In the business model diagram, you will also see accounts payable. These occur when materials or services the company acquires from outside suppliers are supplied on credit. So the cycle is complete from the supply of the goods needed to produce the product to successful sales.
You can see that the managers of the business must have sufficient capital to get round the cycle at least once, then the income earned from the first sale can finance the second sale and so on. The term used to describe the amount needed to keep the cycle running is working capital.
There are two objectives in the working capital cycle:
- The managers want to get round the working capital cycle and arrive back at the beginning with more money than they started with. They want to make a profit.
- The managers want to get round the working capital cycle as quickly as possible. In this way they will minimize the amount they need to borrow to finance working capital.
Some industries excel in speeding cash round their working capital cycle. Major grocery stores, for instance, will often take less than twenty days from when they receive goods until the proceeds from the sales are in their checking account. If they can agree a payment period to suppliers of thirty days, you’ll find that their suppliers fund all their working capital needs. And that, because of their immense power over suppliers, is just what they do.
It’s not so easy when you are selling complex products that take a lot of time to manufacture and which can then sit on the shelves waiting for a customer. In this sort of business, the production department should ideally incorporate raw materials and parts into the product on the day they are delivered by the supplier (known as ‘just-in-time’). In this ideal world a customer will be waiting to buy each product as it comes off the assembly line and into inventory. And, finally, in this commercial Utopia customers will pay their bills on the day that was agreed in the contract. This Utopia is difficult to achieve but represents the objectives of the managers of the business.
In the next blog we’ll look at revenue and capital expenditure.
Exercise doesn’t have to involve sheathing yourself in Lycra and pounding mindlessly to hip-hop backbeats in front of banks of TV screens. In fact, according to The Guardian, a recent report by the Ramblers and Macmillan Cancer Support discovered that walking for half an hour a day five days a week could save 37,000 lives a year and lead to a reduction of almost 300,000 in the number of cases of type 2 diabetes, it can even make weight-loss easier.
For centuries, the daily constitutional (walk) was the best way to stay in peak condition whilst at the same time gaining a bit of perspective on life. In many ways it still is.
Walking can mean more than popping out to the corner shop for twenty Marlboro. Why not take a chance on adventure walking? Even if you only plan a walking weekend every so often – a special weekend in the country once or twice a year – it will inspire you for the smaller everyday stuff like getting out to the park or walking to work. You will need to make sure you have your ducks in a row before you start. I’m talking about finding some great countryside and going for it, but making sure you’re kitted out with the right gear before you set out. It’s unlikely you’ll kick off with a life-or-death hike across the Arctic tundra, but wherever you are, you do need to spare a thought for your safety.
Equipment for your own miracle
One of the first steps to take (excuse the pun) is to make sure that you have all the right gear. And great wet-weather gear is a must. I’m not talking fisherman’s yellow galoshes and capes – these days you can get very light wet-weather gear that will fold up and fit into your pocket. Don’t just get the top, invest in the trousers as well – you’ll thank me for this one day, as there’s nothing worse than being in the middle of nowhere with wet, cold and soggy trousers and no chance of changing them for the next 50 miles. There’s no such thing as bad weather, just inappropriate gear!
The second vital bit of kit for your proper walking experience is the right boots. Remember that you could well have thick socks to allow for so don’t buy them too small. Talking of socks, it’s worth getting proper walking socks. A good outdoor shop should be able to advise you on the right kind of boots and socks for you. The boots need to be protective of the ankles, waterproof and not too heavy. They also need a good grip – the proper lace-up ones are ideal (check out www.snowandrock.com).
The other essential piece of kit is your rucksack or daypack. Choose one with a middle strap that goes round your tummy as this will help to protect your back. These days there are rucksacks that make sure the material isn’t next to your back so you don’t get too sweaty carrying it. Make sure you get one with loads of pockets for maps, bits of string, etc. Also make sure you have basic survival gear: matches (in a little plastic bag so they’re not soggy when you need them), a Swiss army knife, foil blankets, water bottles, oatcakes, nuts and maybe some dark chocolate (temperature permitting). Also, pack a whistle just in case you need to attract attention. And a hat, good sunglasses and some sunscreen. A map is always a good idea, as long as you can read it! And you’ll need to carry at least a litre of water. Obviously in boiling temperatures you’ll need more. Don’t forget to pack a small medical kit that includes some rehydration sachets (electrolyte formulas) and some plasters for those pesky blisters.
Put actual dates in your diary and organise to go walking with friends. Going on long walks can seem quite scary if you’re new to them and can’t read a map, but the gear is only necessary if you’re going to take the whole thing seriously as obviously short walks in the countryside on designated footpaths don’t need full-on survival gear. Always take water with you, however!
Take a holiday that includes guided walks in wonderful countryside. Lots of companies offer this sort of thing now: try www.atg-oxford.co.uk, which offers walks for all levels of fitness and experience. Also check out www.walksworldwide.com and www.theultimatetravelcompany.co.uk.
If you’ve never watched Game of Thrones, you may be missing out on more than mere entertainment. Maybe it’s because you don’t really like stuff about wizards and orcs. Don’t worry: no wizards or orcs in Game of Thrones. Granted there are a couple of dragons, although they aren’t in it much. But that’s not the point. Regardless of your feelings on dragons, with Game of Thrones, as with so much in life, you stay for the stories.
First off – I totally get it. When I was at school, the geeky kids used to play a board game called Dungeons and Dragons, which was like computer games would be if no one had invented electricity. I sat in once, and it confirmed my wish to stamp on the dungeonmaster’s glasses after everyone else went home.
Fast forward 30 years, and I’m glued to Game of Thrones every week. Is this because I’ve successfully dealt with my anger issues, or are the dragons just better these days?
Clearly I’m more tolerant of things that couldn’t ever really happen but are fun to think about, having had my mind unexpectedly expanded by authors such as Alan Moore and Peter Ackroyd. And Game of Thrones isn’t short of mind expanding situations. There are seven kingdoms full of people cheating, fighting, having sex, fighting the people they just had sex with, cutting off those people’s heads, cheating some more, fighting the people who still have heads who are angry because they got cheated, … you get the hang of it. Sometimes the writers bump off the most important character, just to make us go WHAT?
Game of Thrones gets confusing the moment you stop concentrating or nip out to make a sandwich, but I rather enjoy that bit. I am constantly thinking, ‘Hang on, I thought he had been tortured to death in the local brothel last week’ or ‘Is that woman he’s having sex with his cousin or his great aunt?’ These thoughts remind me, perhaps somewhat alarmingly, of an adolescence spent in Odin’s discotheque in Driffield. That was the 1980s, kids. In many ways Game of Thrones recalls that era: a tendency to big hair and shoulder pads, no mobile phones, Charles Dance.
But I digress; trying to make sense of little mysteries should be one of the great pleasures of our adult lives. It is literally what makes us human. As the biologist William Calvin explains in a 2006 paper on ‘The emergence of intelligence’:
Our abilities to plan gradually develop from childhood narratives and are a major foundation for ethical choices, as we imagine a course of action, imagine its effects on others and decide whether or not to do it.
In Odin’s, as in Game of Thrones, most of the time the response was, ‘Let’s do it, what’s the worst that could happen?’
So, we do not learn by being told, but by doing and observing, and working out what happens next. We learn by creating a story out of experience. But, when we grow up and go to University and then get an office job, what does the world give us to make sense of life?
PowerPoint, that’s what.
PowerPoint is anti-story. We go into a room. Someone reads out 30 slides which all seem to be lists. Sometimes the lists magically appear, point by tedious point: as suspenseful as watching a tap drip. Sometimes the lists have little sublists, which have their own titchy sub-sublists. The titchy lists are in italics. No one tells you why. Sometimes there will be important diagrams which pretend they tell a story, but MAKE NO SENSE.
A proper story has what Chris Anderson, the man who created TED talks (and therefore a man who knows about storytelling) calls the ‘aha moment’: the pleasure when we work something out for ourselves, when we realise something without someone telling us it. The fog lifts.
Jokes have this structure, conversation has it, sport has it, walking into a bar and choosing a beer has it, even shopping on Amazon has it. Game of Thrones has it in seven kingdoms, all at once. Presentations do not, because the people who write them don’t bother to put it in. You’ll learn far more about your co-workers from Game of Thrones than you will from a dozen teambuilding seminars.
Being confused for a while is fun, because it’s more satisfying. Presentations are worse than real life, because they take out the stories, the bits that help us work it out for ourselves. If you present to me and there’s no aha moment, you know what I will be thinking: I’d like to stamp on that presenter’s glasses. And if that sounds like negative feedback, it’s better than what happens to most of the characters in Game of Thrones.
We all know what business is and most of us have at least a vague ‘High School Biology’ idea what an ecosystem is but is there any merit in putting them together or is it just another example of a lame metaphor being stretched, pulled, plucked and pinned to make it applicable to business?
Where did it come from?
The term business ecosystem was coined by James F Moore in an article titled ‘Predators and Prey: A New Ecology of Competition’ which appeared in the Harvard Business Review in 1993.
The article won the McKinsey Award for best article of the year, no doubt encouraging Moore to write a whole book on the subject – The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems.
But what does it mean?
According to Moore a business ecosystem is, ‘an economic community supported by a foundation of interacting organizations and individuals – the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders.’
A biological ecosystem is made up of various species, the relationship between those species, the health of the species and how they interact with and affect each other, as well as how they are affected by the environment etc. Business ecology is supposedly similar, only the species are customers, markets, products, processes, businesses, stakeholders and governments.
However, as with most business jargon when you really think about the phrase or term it almost always states the obvious. Business by definition is a collection of people, processes, resources and other businesses that come together to create value and deliver a product or service. Sure, it may be marginally similar to a biological ecosystem which explains a community or network of living organisms and non living components that interact as a system but it’s tenuous at best.
Moore does his best to extend the metaphor by urging business to seek ‘symbiotic’ relationships and to ‘coevolve’ both in terms of their capabilities and roles but also in terms of their environment and other businesses. He stresses that, ‘the particular niche a business occupies is challenged by newly arriving species.’ Well no shit Sherlock!
Where can I find a business ecosystem?
Initially you could find this little nugget of wisdom in mainstream business but numbers of executives willing to look like a muppet are dwindling. Today the term has retreated to the rarefied atmosphere of IT where the term itself has coevolved and become widely adopted by the high tech community. A shift greatly assisted by economics professor J Bradford DeLong’s explanation that ‘business ecosystems’ describe ‘the pattern of launching new technologies that has emerged from Silicon Valley’.
He went on to define business ecology as ‘a more productive set of processes for developing and commercializing new technologies’ that is characterized by ‘rapid prototyping, short product-development cycles, early test marketing, options-based compensation, venture funding, early corporate independence’.
On one hand this redefined interpretation of business ecology is certainly more definite and potentially useful to at least some parts of business but what the new definition of business ecology actually has to do with the accepted understanding of either business or ecology is less obvious.
Are there any ways I can make use of the term?
Not many! Because of the change in meaning over time it’s probably safer not use it at all. Besides it’s just pretentious!
Business by definition is the coming together of suppliers, distributors, customers and processes as well as the navigation of competitors, regulators and governments to deliver value. Most people in business already know that so giving that a new name beyond ‘business’ seems completely unnecessary.
That said, if your ethical compass is more than marginally off true north and you want your business to look a little ‘greener’ that it really is then it may be a useful phrase to hijack!
While some environmentalists have used the term as a way to talk about business sustainability and the environmental impact of business rather than a metaphor to describe the increasing complexity of relationships inside and outside business other environmentalists believe the use of the word ecosystem is just a smokescreen and a copout. Instead of taking environmental concerns seriously many believe that the use of ‘business ecosystem’ simply allows business executives to pretend they lie awake at night worrying about the polar ice caps when all they are really doing is cashing in on the environmental and sustainable gravy train.
by Fons Trompenaars and Piet Hein Coebergh, co-authors of 100+ Management Models.
How can one create wealth by doing business with the 4 billion people at the bottom of the financial pyramid?
In economics, the bottom of the pyramid (BoP) is the largest, but poorest socio-economic group, comprising around 4 billion people who live on less than US$2.50 per day. Conventional logic holds that there is little business to be done with this ‘market segment’. Together with academics Stuart Hart and Allen Hammond, C.K. Prahalad turns this logic around by analyzing how the total buying power of this group could be stimulated, as long as there is access to vital resources such as money, telecommunications and energy.
The simple observation is that because there is much untapped purchasing power at the bottom of the pyramid, private companies can make significant profits by selling to the poor. Simultaneously, by selling to the poor, private companies can bring prosperity to the poor, and thus can help eradicate poverty. Prahalad suggests that large multinational companies (MNCs) should play the leading role in this process, and find both glory and fortune at the bottom of the pyramid. Prahalad suggests that there is much eagerness to do business in this sector – as long as traditional barriers can be modified.
How to use the model
To enable poor people to use their buying power, Prahalad suggests making use of the following twelve building blocks. Solutions must:
- be low priced
- merge old and new technology
- be scalable and transportable across countries, cultures and languages
- be eco-friendly
- put functionality above form
- be based on innovative processes
- use deskilled work
- educate customers
- work in hostile environments
- be flexible with interfaces
- be available for the highly dispersed rural market as well as highly dense urban markets
- be fit for rapid evolution
The idea behind BoP has enjoyed global acceptance since its presentation in 2002. An earlier example of how doing business with the poor can pay off for all stakeholders is given by the success story of Bangladeshi banker, economist and Nobel Peace Prize recipient Muhammad Yunus, who developed the concepts of microcredit and microfinance, small loans given to entrepreneurs too poor to qualify for traditional bank loans. Other examples include the limited success of the Tata Nano car and the success of Hindustan Lever Ltd., one of Unilever’s largest subsidiaries.
Critics have claimed that the BoP proposition might be too good to be true. Karnani (2006) states that the BoP proposition ‘is, at best, a harmless illusion and potentially a dangerous delusion. The BoP argument is riddled with inaccuracies and fallacies.’ Other than the success of microcredit, there have not been many convincing examples of the fortune to be made at the bottom of the pyramid (Kay and Lewenstein, Harvard Business Review, April 2013).
Karnani, Aneel G. (2006) ‘Fortune at the Bottom of the Pyramid: A Mirage’, Ross School of Business Paper No. 1035, Available at Social Science Research Network.
London, T., Hart, S.L. (2011)Next Generation Business Strategies for the Base of the Pyramid: New Approaches for Building Mutual Values, Upper Saddle River, Pearson.
Prahalad, C.K. (2004) Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Philadelphia, Wharton School Publishing.