Back to the future… or maybe…

Dr. Emmett Brown: I’m sure in 1985 plutonium is in every corner drug store, but in 1955, its a little hard to come by! I’m sorry, but I’m afraid you’re stuck here..

Back to the Future

 

All that is solid melts into air.

Karl Marx

One of my enduring intellectual fascinations is whether things are actually changing any faster now than in previous epochs (the next book I have to read is Human Race: 10 Centuries of Change on Earth). I think I am an iconoclast by nature and I struggle with the fact things are completely new in a relative sense: Can we really say the internet was bigger than the printing press? I get change is “faster” now, but so is commication? Anyway I will read the book.

I arrived in London in 2000, right in the middle of the dot-com boom. Everyone claimed the couldn’t understand it (I was working for a management consultantcy), and I actually think a lot of people could understand it but didn’t want to admit the implications of it, but the historical examples were looking people in the face: Tom Standage published (an underrated book) The Victorian Internet, that made clear to anyone with a sense of history that the scale of change was precendented, and hardly unique to one generation. Some of the issues regarding open systems for software in the modern era are compared skillfully to debates regarding railway gauge width. It will come as no surprise to most that I think Standage makes a good argument that the Telegraph may have been more important than the internet.

Quite why each age is obsessed with its own sense of modernity is not something I want to tackle here, I have my own (deeply cynical I must concede) theories, but my I have always remembered the book “Hypercompetition” as a standout example of this self-conceited position. Hypercompetition describes a world where:

Business has also entered a new age of realities. It is essential to understand and take advantage of the dynamic motion and flux of our global markets and technological breakthroughs… [Hypercompetition] is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know how and establish first mover advantage, competition to protect or invade established product or geographic markets, and competition based on deep pockets and the creation of even deeper pocketed alliances.

Seriously? That just sounds like industrial capitalism. Selling a steam engine to India in the 1890s may not have been as sexy as creating WeChat or Lyft, but it wasn’t that easy either, and within the confines of the environment in the time you had to move just as quickly and be just as innovative, or did you?

The original theory was publshed with some (controversial) research that indeed suggested when looking at  a broader group of companies than the S&P 500:

support for the argument that over time competitive advantage has become significantly harder to sustain and, further, that the phenomenon is limited neither to high-technology industries nor to manufacturing industries but is seen across a broad range of industries

But it wasn’t universally accepted: the core difference being the researchers who agreed with this notion only focused on firms that appear to have consistently generated higher economic returns not the total universe of firms. McNamara, Valler, and Devers note:

Some strategy scholars and practitioners contend that markets have become increasingly hyper- competitive in recent years. We examine this contention by analyzing industry and business performance patterns in a broad sample of firms… We find little support for the argument that markets have become more hypercompetitive. From the late 1970s to the late-1980s we observe decreased per- formance and market stability, consistent with increasing hypercompetition contentions. From the late 1980s to the mid-1990s, however, trends reverse and performance and market stability increase.

I love the 80’s. My entire music collection probably consists of Greatest Hits of 80’s. It might be heartbreaking for us now to accept but economically and competitively they were harder times – from a macroeconomic perspective particularly. I remember when my parents nearly lost their house in the 1980s when mortgage interest rates when up to 18% and the government attempted to ban inflation with a “price freeze” (seriously). Imagine that now? It is one of the events that actually led to NZ becoming the first country in the world to make their central bank (relatively) independent (in 1989).

A decade that started with the Iranian hostage crisis and finished with Tianaman Square was a tough time competitively, and a large part of that is because many companies simply didn’t have the pricing power they now do. A less global, more domestically focused economy, without Chinese competition, was actually a harder time to be a manager. One of favourite theories involves cross-ownership: as asset managers have got so large (and indexing enhances this), and therefore have so many cross shareholdings, they discourage competition amongst their investments. Azar, Schmalz, and Tecu find:

[i]n the US airline industry, taking common ownership into account implies increases in market concentration that are ten times larger than what is “presumed likely to enhance market power” by antitrust authorities….We conclude that a hidden social cost – reduced product market competition – accompanies the private benefits of diversification and good governance.

Basically ticket prices are 3-5% higher than they would be if the airlines had seperate owners. As well as common ownership the increasing size of banks and the scale if the M&A they can now underwrite is also driving industrial consolodation on a scale that simply wasn’t possible in the 1970s and 1980s.

From about the time Hypercompetition was published (1995) economists began to realise that modern economic change, in first world countries, was characterised actually by a proportionately smaller number of larger firms with market power, higher profits, and greater stability. As these researchers in 2016 make clear:

[a]bout a decade ago a stream of research emerged looking at changing persistence over time and finding a monotonic trend toward a new “age of temporary advantage”… We find that the trend reversed itself and the beginning of the 21st century has been characterized by increasing persistence of superior performance… our results appear not to be a consequence of a compositional shift in the economy of industries toward those with lower levels of competition nor of increased conservatism by newly listed firms. Instead the phenomenon appears to occur primarily within industries by seasoned firms. 

Hence my interest was piqued by this excellent article on Bloomberg yesterday that posits:

modern capitalism produces and probably requires a lot of creative destruction. But this isn’t a relentless, ever-accelerating process. It goes in waves. For about 15 years now we’ve been in a lull, and it’s not at all clear when or how it will end.

The core of this sort of analysis is survivorship bias: just looking at how many big companies are still in business or part of various indexes. Standard Oil, for example, has consistently remained one of the largest industrial corporations in America (now under the guise of ExxonMobil) for over 100 years and ATT was the second largest US company in 1917. A few Facebook and Google new entrants does not change the basic makeup of the modern economy but they do show up in the profit figures:

ROIC 90th percentile.png

Basically a small number of firms are pulling away in profit terms of the others and entrenching themselves as modern monopolies according the Council of Economic Advisers:

Market Concentration.png

The evidence seems clear: there hasn’t been a better, or easier,  time to be a big company since pre-Roosevelt days.

 

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