Daily Archives: December 7, 2007

the doctor Would Like To Remind You That Any Balloon Will Pop Under A Sufficient Pressure Differential

I don’t care what it’s made of – there isn’t a container in existence that won’t explode if filled to a point where the internal pressure exceeds the external pressure by a sufficient amount. Remember the second law of thermodynamics – the entropy of an isolated system not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium .

In free-market economics we have a similar law, called the law of supply and demand which predicts that in a competitive market, price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity . Taken to extremes, it means that if prices skyrocket, demand plummets, falling to zero at the extreme. This holds true in the stock market as well, as it’s a free market where the good is ownership.

That’s why we have boom and bust cycles and why an unrestricted boom is guaranteed to result in a spectacular bust. There comes a point where investors en-masse are going to decide that the price is just too damn high and want out, even if we don’t know what that point is in advance. That point is much more likely to be hit if share prices rapidly skyrocket. If this happens market-wide, due to a sizable increase in invested capital in a short time-frame, we have a boom. If the boom continues unabated, a bust is guaranteed.

So, needless to say I was quite annoyed to see an article titled Emerging Market Mania: Is It Different This Time on the Knowledge @ Wharton site (one of my favorite publications) – because the answer is bloody obvious. It’s not different! It’s never different! The laws are immutable! As long as we use a system of measurement that places a finite value on the GDP of each nation, the sum of the GDP for all nations is going to be finite. This guarantees that there will exist a point in each stock market, and each stock, where the price will be too high for the average investor, and these investors will want out en-masse. When this happens, you have a bust. “Market Mania” is always bad! Participating in market madness again and again is equivalent to putting your hand on that hot burner again and again. You’re going to get burned. That’s not going to change! And don’t give me that “it’s a different company” or “it’s a different market” bullshit as your excuse. The fact is that any burner on the stove will burn your hand just like any burner on any stove will burn your hand.

So, before you go diving into a market everyone else is diving into, be sure to do your homework and make sure it’s a justified move. If a market is extremely under-valued or under-served or has a considerable excess of supply, then it will be able to support a large influx of competitors and currency. However, if it is over-valued or over-served or does not have enough supply to meet current demand, any investment or entry by any organization is a very bad idea and you never know what entry is going to be the entry that causes the market to reach the tipping point and start the rapid downhill slide from boom to bust.

If you’re wondering why I’m rambling on about the inevitable bust that’s sure to follow an irrational boom, just remember that it’s not just finance that needs to worry about market valuations – supply management has to as well! The financial strength of your supplier is at least partially dependent on the financial strength of the market it’s shares are traded in or on the strength of the local economy. From a risk management perspective, the financial strength of your supplier is a key factor in terms of evaluating how much risk an award to that supplier poses – and any supplier in a risky market is going to carry a certain amount of risk.

Before I conclude this blogologue, I should point out that the article did have some good points. It pointed out that emerging markets cannot be evaluated en-masse – each is distinct and needs to be evaluated on its own. It stated the need for differentiation between emerging markets like Brazil, Russia, India, and China (the “BRIC”) and the frontier markets like Egypt, the Balkans, Bangladesh, and parts of Africa that could be the next investment hotspots. It noted that countries with abundant natural resources will likely experience an economic boom for the foreseeable future (thanks to increasing demands from the developing economies). And it noted that knowing where to go next with investment capital is always a challenge.

Supply Management in the Decade Ahead III: The Eight Major Forces – Part II

In Part I of our review of Succeeding in a Dynamic World: Supply Management in the Decade Ahead, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPs, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. In Part II, we dove into the details of the first four of the eight major forces. Today, we dive into the last four of the eight major forces and explain not only why they are important, but what can be done about them.

Customer & Channel Dynamics

The downstream supply chain will change rapidly due to economics and government policies in some industries. In other industries, supply chain dynamics will be influenced by the poor financial condition of major trading partners in the chain. The impact of private equity firms will also be significant, who will continue to take public companies private, slash costs, raise prices, and change business relationships.

In other words, the only difference between conducting business today and conducting business in the next ten years with respect to channel dynamics is that these changes will continue to come at an accelerating pace and you will have to adapt faster than you do today. This means that the winners will be those companies that have good visibility into their supply chains – the ones that can identify when an impending regulation or buy out will affect them before it happens and have a contingency plan ready to go the instant it happens.

Increased Product Variety & Shorter Life Cycles

Variety will continue to mean more models, brands, and products tailored to different geographies and price points. Consumer tastes in emerging economies will be new and different from traditional markets. Traditional lines of competition will blur as companies try new products and markets.

True, but eventually someone will realize that you don’t want to browse the web on the screen the size of a credit card, you don’t want your fridge to tell your local grocery store that you consumed six litres of rocky road this week, and that you don’t want the ability to cut yourself seven times in a jagged fashion simultaneously while shaving. Amongst the big winners will be the companies that realize sometimes you just want a phone, a fridge, and a straight razor – and not all the garbage hallucinators are trying to shove into these products today. And, oh yeah, there comes a point where it doesn’t matter how many fractions of an ounce less it is than the previous product, how many extra cubic inches you squeezed into the door, or how fast it vibrates (at least in the case of the razor).

Social Responsibilities

Companies in developed economies will continue to be held to high standards wherever they do business in the world. Companies will have to monitor working conditions in their supply chains all the way back to basic extractive and farming practices. Supply management will have to ensure that the supply base meets environment standards. Commitments to a diversified supply-base will become more important in developed economies.

This is true, but it misses the point that it won’t be Green Peace and PETA that you worry about in the years to come – it will be your customers, who, greater informed about your supply chain practices than ever before, will start to boycott your products even before Green Peace and PETA gets their campaigns against you off the ground. Industry self-regulation will require you to exceed government standards, or be barred from cooperative partnerships and organizations that could help you survive in the dynamically changing marketplace to come. And, oh yeah, today’s “social networks” will have nothing to do with the solutions.

Environmental Responsibilities

Continuing the social responsibility theme, customers, consumers, shareholders, non-govermental organizations, and governmental bodies will all increase their scrutiny of corporate environmental practices in all regions of the world and demand that companies take environmentally friendly actions. Companies will be forced to meet the environmental expectations of the general populace. Environmental issues will become brand-related issues and influence how companies are viewed in the marketplace. To meet environmental commitments, companies will put together cross-functional teams with executive leadership to monitor environmental concerns in the extended supply base.

All this is great, but I believe that sometime in the next decade, carbon offsets will start to peak out in the developed nations as consumers smarten up and realize that some of the larger companies with the deepest pockets are using them as an out to avoid every doing anything to decrease their environmental footprint. When their only other options are to make the hard choice of investing hundreds of millions, if not billions, to upgrade your factories or re-invent yourself around less harmful products, most executives are just going to take the easy out and buy the carbon credits. These are the same companies that today are content with buying innovation whenever they need it, as they are pseudo-monopolies due to the high cost of market entrance and / or the time it takes to build up the sizable customer base they’ve acquired. Fortunately, when the impending commoditization is combined with consumer revolt, there’s a good chance that their currently unchallenged position at the top will not remain unchallenged for much longer.