By Guest Blogger Paul Anglin
For students, and especially for business students preparing for a final exam in economics, final exam time is a time to be tested. You will be assessed, numbered and maybe found wanting. This posting aims to tell you that failure can be a good thing and to suggest how to make it better.
I figured that it was always my job to make sure that the team was excellent, and if I didn’t do it, nobody was going to do it. Steve Jobs by Walter Isaacson pg 570
If this biography is to be believed then it is clear that the love of Steve Jobs’ life was not his family, his friends, his Zen-god, his wealth or even himself. The love of his life was his creations, the work of his mind. He was passionate about Macs, NeXT, Pixar, iPods, iPhones, iTunes, iPads and all of those iNventions. He paid whatever price it took for his creations to be excellent–even his health.
I will let you decide for yourself what you think of the man as portrayed by Walter Isaacson. Here I will give a few comments from the armchair of an economist.
1) Apple demonstrated in a few short years the Schumpeterian concept of creative destruction. Schumpeter said that innovation often created temporary monopolies but eventually they would be destroyed by competitors to create new wealth. Not only did Apple monopolisticly compete with other high-tech firms, it also cannibalized its own products in favour of new and better ones.
2) Profits matter even if people say that they are creating something for the love of it , In order for Apple to do everything that it did, Apple mastered the art of making big profits. For example, in 2010 Apple captured 35% of the profits with only 7% if the revenue in the market. This also demonstrates the difference between sales and profits—-Sales only matter as they relate to profits.
3) Options are only worth something if the market price of the share is higher than the strike price on the option. Unfortunately for Jobs, his options were priced just before a stock market crash rendering them useless because he would have to buy shares at prices far above what the market was charging. Thus, you can’t always believe the salaries quoted in the news if options are part of the package.
4) Productivity matters and CEO’s have to figure out how to increase it. Steve Jobs seems over-the-top tough but somehow the employees who survived thrived in this environment. Team A types like to work with other A types and find B types annoying. Jobs kept Apple filled with A type people who accomplished more than they thought possible. Their efforts never seemed to surprise Steve however.
5) Sometimes supply creates its own demand. When asked if Apple had done any market studies for its products, Jobs said that if Ford had done a market survey customers would have just asked for a faster horse. Customers don’t always know that they will love a new product. It seems that many times the initial assessment of a new Apple product was lukewarm by the pundits until it hit record sales in the marketplace.
Sam Rogers (Kevin Spacey): “You cannot be doing what you are thinking of doing.” Margin Call 2011
One of the basic principles of a well-functioning capitalist system is trust. In fact the word credit comes from the latin word creditum which has the same root as the religious word creed (which usually start with the words “I believe”). Furthermore, this trust needs to be systemic to work effectively. Indeed like marriage, a capitalist system doesn’t usually work when trust is difficult. It only makes good business sense for a person to give credit if they trust the recipient and believe they will pay back the loan. The surest way to make sure your counterparty will do that is to know and like each other. Bankers often talk about building relationships because relationships build trust, reciprocity and profits . That is why Margin Call is so depressing.
The normal marginal benefits of a relationship (the profits) between competing investment bankers usually exceeds the marginal costs of acquiring those profits. Investment bankers sell or swap assets with each other. They know each other’s names and maybe even go out for drinks later. Ongoing successful relationships are about this give and take. But that all changes when the game is about to end. In Margin Call, the 20% who weren’t fired the day before are given exorbitant amounts of money to sell what they know to be junk to their counter parties (or friends) in other firms. It is all about taking as quickly as possible because the system is going down and these brokers are asked to use these trusting relationships to make their final score. The friendships will never be the same again.
In the movie, the head honcho or CEO John Tuld (Jeremy Irons) preaches three ways to become rich: 1) Be first, 2) Be smarter, 3) Cheat. He declares with great pride that he doesn’t cheat but in a way he does. He is cheating on the relationships by discarding them. With his actions he is saying that the marginal costs of the numerous relationships are now too high when compared to the marginal benefits of saving his company. He needs to be first out of the gate to do that. As the CEO he gets to make that margin call.