Last week I discussed dry ol’ theory again, looking at competition theory and the continuum from perfect competition to monopolies, but with some real world examples thrown in to show that the dismal science (economics) can actually has some real world applications.
The conclusion was that all market participants try to make, or wish their market segment was as close to a monopoly as possible. This would allow that business to charge whatever it wanted, and make larger profits as a result.
That’s what businesses are trying to do when they make themselves a little different from their competitors; they are trying to create a market within a market where they are the only supplier. If they do this well enough the results can be spectacular.
I also discussed “rent seeking” (charging higher than reasonable prices to create larger profits) in competitive markets and the way markets force all players to bring their prices closer to each other, particularly where the product being sold is fairly similar.
Well, what about instances where players have an advantage?
This is really what I am talking about above where all business owners are trying to create their own mini-monopolies. They can do so by making their product a little different (hopefully a little better/different, not a little worse/different). In economics circles this is called competitive advantage, where a product acquires certain attributes that its competitors don’t. Not to be confused with comparative advantage, which is where a supplier is able to produce the same good at a lower cost than its competitors.
Think about the now closed Spanish restaurant El Bulli, created and run by the Spanish chef Ferran Adria, the creator of molecular gastronomy. Only open 6 months of the year and located in a remote bay on the Catalan coast, all seats were often booked out 12 months in advance by diners from all around the world.
One could only obtain the Adria-created dishes featuring, amongst other things, the use of liquid nitrogen as a cooking agent and reduction of food stuffs to foam, at that location. The quality and exclusivity was such that Adria created a mini-monopoly. This in an industry that is renowned for competition where a mini monopoly was created by new skills and technology, and was completely supply-side driven. There’s no question that demand existed, it just took someone to innovate to provide the supply to meet the demand.
Adria’s impact was such that it spawned a new generation of celebrity chefs, chief among them Heston Blumenthal, recently seen on Masterchef. And now Adria’s monopoly is over and his “rent seeking” prices are no more as his competitors have taken his technology/skills and flooded his market. Maybe that’s why he closed El Bulli, as he knew the window had closed?
Another example of this type of “point of difference” is the resurgence of vinyl records as a medium for music fans, however this example shows how a near monopoly can be broken.
Another of my mates, let’s call him The Audiophile, put me onto the unusual case of the resurgence of vinyl, with the chart below showing sales over the past few years.
Vinyl had a monopoly on recorded music distribution until 1989, when compact discs (CDs) entered the market. Between 1989 and 1993 there was a battle for market share, with CDs winning comprehensively and almost killing vinyl completely. Records were only kept alive by the aficionados, who often claimed the sound quality was richer and more real than CDs.
I would argue that the near death experience suffered by vinyl was caused by supply-side effects as although there was growing demand for more portable music, CDs were cheaper to produce and were smaller and easier to store and ship.
The CD boom coincided with sharp decline in the number of independent record/music stores, as the market consolidated down to a few large chain retailers.
The Audiophile is a passionate man, much as The Proprietor and The Trader from past Updates. I have a sub-woofer in use at my place built from scratch by The Audiophile and have always consulted him on all matters acoustic. Vinyl had declined as a medium for recorded music to such an extent that once, almost a decade ago, when I travelled to Hong Kong, The Audiophile had me purchase a particular turntable stylus as that model wasn’t available in Australia….and it was expensive.
Now, however, consumer tastes have changed and vinyl sales have exploded, but was it demand-side or supply-side forces that re-established this market? It certainly appears that it was pent up demand.
But, look at the year vinyl sales started to trend upwards; 2007/2008.
The near monopoly over online music sales held by iTunes, and the potential loss of revenue flowing from pirated music were motivating factors in the establishment in 2007 of Record Store Day, which happens worldwide on the 3rd Saturday of each April.
This movement was started to celebrate the culture of the independently owned record store and includes Metallica, REM, Vampire Weekend, Billy Bragg and others as unofficial ambassadors.
As well as an annual event, Record Store Day is also now an organisation that coordinates events all year round, creating a more vibrant market for vinyl music. So it appears that once again it was supply side action that breathed some life into a market.
And The Audiophile couldn't be happier.
So, in competitive markets where demand for a product, in a broad sense, already exists, it is possible for new suppliers to do something new or different and make good profits…even if it has been done before.
Even if the product being supplied is highly discretionary and involves the customer paying a premium.
You just have to be good at it… whatever it is.
I suspect this is actually the point a lot of people miss when they decide to open a new cafe or restaurant. On a more cynical note I suspect this is a point most large corporations are very aware of, but more on that later.
It appears people may be attracted by the romance of being self-employed, as well as the glamour of being the owner, and as a result one or more of the calculable risks are forgotten. Sometimes I even think the same romance is to blame for the boom in Reality TV shows and wannabe stars.
I call it our “Silver Bullet Culture”.
I have stated previously that 80% of employees are not particularly good at what they do, but after watching a particular Technology Entertainment Design (TED) Talk on YouTube, I think this is actually because 80% of employees hate their job, and as a result are pretty poor at it. There was absolutely no thought put into what type of work the employee wanted to do when they started their career and they have lurched from one job to another, always chasing either the money or suffering from a bad case of “the grass is always greener.”
These types of statistics are at the root of the lack of workforce productivity currently being bemoaned by the leaders of industry. Anyway, as 4 out of 5 people hate their job it stands to reason that they are seeking a way out…and not always a reasonable way out.
This lack of planning is endemic, as shown by a 2011 survey which found 17% of Australians still based some or all of their retirement funding plans on winning the lottery (I know, I couldn't believe we would be that stupid but apparently we are.).
So, people want a way out of their meaningless, soulless jobs. Some do a bit of research and introspection and decide on a career change, while others apply for reality TV shows or open restaurants.
The hope is that lightning will strike and they will be rescued from their banal existence and be granted instant stardom and wealth. That Matt, Garry and George from Masterchef will walk in the door, declare their establishment the next El Bulli and riches will follow.
But we all know it doesn’t happen in real life. Despite this the hope being sold by reality TV and new business ventures keeps being bought.
If we use this prism to look at the WA experience I would be confident in saying large parts of the WA work force have suffered from a bad case of short term-ism regarding their careers.
What does short term-ism mean, I hear you ask?
Making decisions to pursue jobs purely on the basis of money. Recall I mentioned in the Update of two weeks ago that opening your own small business purely to chase the money wasn't an acceptable reason? Well, neither is chasing the money an acceptable reason for an employee taking a role.
I have heard a lot of anecdotes about engineers being lured away from smaller firms to work for Leighton Holdings, Monadelphous, etc.
Yesterday I was talking with another mate we will call The Grinder (a friend from tennis days) who recounted a tale where a friend in the law industry took a role with the late Forge Group and boasted about the money versus effort required. This friend tried to get The Grinder to join him at Forge, but fortunately The Grinder declined, electing to stay with the firm he had been at for years.
Forge goes BOOOOMM! And The Grinder gets a call from his mate apologising for giving him advice that if taken would have yielded the shortest of short term benefits, then been followed immediately by a long period of uncertainty.
And that type of story is emblematic of the WA workforce over the past 5 years. The macroeconomic signals that the good times are over for workers are a rising unemployment rate, which at 5.9% is the highest it’s been since Dec 2003, Dun and Bradstreet reporting that consumer debt stress is at the second highest point on record and a flat or negative trending State Final Demand (recall SFD is the dollar value of goods and services bought and consumed within WA, so exports are excluded).
What about small businesses? It’s all good talking about markets and their competitive nature, but if your market is shrinking do you have cause to worry?
Not really. Once again, if you are good at what you do you have nothing to worry about. Having said that, the number of businesses failing is rising, up by 20% in WA from the same time a year ago, but that statistic is what’s called a lag indicator as it reflects what has happened, not what’s going to happen.
The forward looking statistics are unfortunately a bit more qualitative, but fortunately a bit more positive. Dun & Bradstreet report that 19% of small businesses are planning to purchase new assets in the next 12 months, while 64% of business owners are more optimistic about 2014/2015 compared to 2013/2014.
Here are the results of two key areas of Dun and Bradstreet’s survey in table form.
Major Area of Concern for 2014/2014
Cash flow 32%
Value of Aussie Dollar 16%
Wages and Salaries 12%
Interest Rates 11%
Fuel Prices 7%
Access to Credit 6%
Barriers to Growth
No Barriers at all 32%
Slow Demand Growth 23%
Online Sales by Competitors 11%
Shortage of Skilled Labour 9%
Utilities/Operating Costs 7%
Unpaid Invoices 5%
Access to Funding 4%
Do these results match your thoughts?
Food for thought…