SOPHISTICATED FINANCE

Thoughts on iPad and Interface

I have just completed a trip to Brazil. This was the first trip in more than ten years where I traveled without a laptop. I took only my iPad and my Blackberry. It was very nice traveling without the weight of a laptop, no special airport screening for the iPad and with a little further thought I may be able to travel without a briefcase. Now that would be perfect.

With 100% reliance on the iPad, I was forced to better learn the interface. I still think a better cut and paste function is needed and there is no easy way to use DropBox or Evernote to save a web page in Safari. That needs to be addressed. Feeddler is a great RSS feed reader. It integrates to both Evernote and Dropbox and the Instapaper option works beautifully. May even get it for my Mac, but I just checked and it is only available for iPad and iPhone

One funny thing was that with so much iPad use I started to use my Blackberry like it had the iPad interface. Suggests to me that the iPad interface is a more natural way to use a computer, which would explain why young children (2-3) can learn the iPad so quickly.

One idea I have been debating for 2-3 months is giving up carrying a phone. I would keep the phone number and Phone Tag, which converts voicemails into email messages at a very high quality of transcription. I only get about 5 phone calls a week so those calls could be returned at my convenience with Skype. The problem would be handling text messages, which is the way everybody contacts me if they want immediate attention (or Twitter). Need to find an iPad app that receives the text message and converts it to an email and also gives me the ability to respond with a text message. Then I could give up carrying a phone. Might then put a data plan on my wifi iPad.

Now if Apple came out with a 7 inch iPad that fit in a sports jacket pocket every thing would be perfect.

Note: Kindle on the iPad works well but the native Kindle environment has better features. Still believe that the Kindle has the best interface and form factor to disrupt the iPad. 

Poverty Alleviation in Latin America-Conference at UM

I will be speaking at the conference on Poverty Alleviation in Latin America sponsored by the Center for Hemispheric Policy at the University of Miami on May 18. More details are here. Santiago Levy from the IDB is the featured speaker. The Center is under the direction of Susan Kaufman Purcell, with whom I shared a panel in February.

World Bank Report on Colombia Education Misses the Point

The World Bank issued a note in January 2011 on its evaluation of a two year program in Colombia for the use of computers in schools. The purpose of the program is stated below:

"The program’s stated goal was to train teachers to use computers in specific subjects, with a focus on incorporating the computers into classroom teaching of Spanish and math." 

The findings from the study were:

"Students in schools that received the computers and teacher training did not do measurably better on tests than students in the control group. Nor was there a positive effect on other measures of learning."  

"Researchers did not find any difference in test scores when they looked at specific components of math and language studies, such as algebra and geometry, and grammar and paraphrase ability in Spanish."

The interesting fact about the study that was overlooked in the report conclusions was:

"About 66 percent of students in schools in the program reported using a computer in the previous week, compared with 41 percent of students in the control group"

No where in the report does the World Bank question the methodology used in Colombia. Instead of questioning whether occassional use of a computer is an effective educational method, the report merely points out that the program showed no positive results. Colombia has long operated computer labs and consistently derived no positive effect on the students from such an approach.

When is a development bank going to tell Colombia to stop wasting money on computer labs and other limited access approaches to computing. Sadly, Inter-American Development Bank is supporting a new bid this month by the Colombian government to expand the computer lab approach with 80,000 additional computers.

As long as development banks continue to support failed methodologies in education there will be no improvement in student performance. It is time for development banks to support either 1:1 computing approaches or online approaches such as Kahn Academy. 

The views expressed herein are my personal views and do not reflect the views of any organization with whom I am affiliated.

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Related articles

• Economic Development, Education and Multi-lateral Banks (Sophisticated Finance)

The Future of Amazon in 2030

BI recently published a story on what Amazon will be in 2030. In contrast with their usually interesting predictions, the Amazon story was a bit flat. BI's forecast included these three interesting ideas:

1. Amazon will be as big as Wal-Mart; I suspect that new store revenue for Wal-Mart will outpace online sales for Amazon because Wal-Mart will have less competition in China compared with online competitors for Amazon.
2. Amazon will sell a lot of merchandise under its own brand (private label); I doubt this because Amazon is not a retailer but rather more of an exchange that facilitates a sale rather than sources its own unique merchandise. (Bezos knows he is not a merchant.)
3. Amazon will be the biggest payments company; I think someone more ensconced in the emerging mobile payment system that replaces the role of a bank will be the biggest payment company

My predictions for Amazon in 20 years include:

1. Amazon will be a big player in tablets or the next generation of tablets. The Kindle could easily evolve into a low cost tablet with just an operating system and screen upgrade, there is a developer community in the making and an existing infrastructure to provide the ever popular video content. Also, the Kindle has the best form factor of any hand held device on the market (phone or tablet).
2. If search becomes more specialized with vertical market search engines, as I expect, then I think Amazon will dominate product/merchandise search. I think Amazon needs to work on integrating more third party content into their product reviews but this is fairly trivial.
3. I think Amazon will develop or buy its own cloud based software offering and challenge Google and Microsoft in the Office/productivity space. A bit far fetched, but maybe they will pay us to use the software in return for watching advertisements for products available from Amazon. Their book suggestion engine is already the best available for any category of information and could easily be adopted to a broader range of merchandise.
4. I think Amazon will maintain its lead in cloud computing services.

Amazon is perhaps the best run tech company in the world, builds new businesses based on their own internal strengths, has a profound understanding of user interface and does not suffer from feature overrun in any of their offerings. I think Amazon will be the second or third largest company in the U.S. by 2030 unless oil goes to $200/barrel.

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Related articles

• Speculation on an Amazon iPad competitor (marco.org)
• Amazon introduces ad-supported Kindle with Special Offers (macworld.com)
• Lessons from the Kindle (Sophisticated Finance)

The Business Model of Social Entrepreneurship

In The Entrepreneurialist blog recently they posed the question "if social enterprises have emerged to fill a gap between the government and civil society". I think this question might have been better phrased "if social entrepreneurship has emerged to fill the gap between government and free enterprise" or for profit companies. I am always troubled by the assumption that there is a society above and beyond the cumulative individuals and their personal conflicts between self-interest and morality. The economic development theorists frequently talk about "society" but I am not sure that it is a meaningful term in an economic sense.

While many see social entrepreneurship as a force for good, I think it is more helpful to see social entrepreneurship as just another business model. While many in social enterprises are enamored by the "doing good" I think that business model thinking provides more insight. 

First let's review the basic thinking of Clayton Christensen, the HBS professor who did so much ground breaking work on innovation. Basically, Christensen said that innovation appears in large, underserved markets where cheap, limited feature set products and services satisfy the customer need. Now consider the status of the developed country markets. These markets are saturated with products and services, slow growth and highly competitive. In contrast, developing markets have large populations, little competition for goods and services and very low customer expectations to satisfy basic needs. A Christensen approach is tailor made for developing markets. In fact, the developing markets may be the last remaining frontier for significant entrepreneurship (unless you are getting a PhD at MIT or Stanford).

In summary, I think that social entrepreneurship has emerged in recognition of the market opportunity in developing countries. The social entrepreneurship focus on low margins, cheap products and creating volunteer communities to keep costs down is pure Christensen and the basis for a business model. I have always been troubled by the label "social entrepreneurship" because a company could achieve all the same ends without ever thinking about "doing good". The poor person in Africa does not really care if the seeds they plant were developed by UNESCO, the Gates Foundation, 3M or a startup company in Atlanta. The poor person just wants their needs satisfied as cheaply as possible and the philosophy behind the solution is irrelevant.

This story was inspired in part by this post in Fast Company about C.K. Prahalad. Prahalad was a professor at the University of Michigan and one of his research interests was the "bottom of the pyramid", poor people in developing countries (such as his native India). One of his frequent themes was the aggregate purchasing power of the poor. My experience in Indonesia for ten years supports Prahalad's view and perhaps explains my reluctance to acknowledge any meaningful distinction between social and traditional entrepreneurship.

I would welcome comments on this post. 

Bond Rating Agencies--China vs the U.S.

Traditionally bonds for corporates, banks and sovereigns have been rated by Moody's, Standard & Poor and Fitch. All three of these rating agencies are based in the U.S. It is not surprising given the size of the U.S. bond market and the large institutional investor base here. Of course the size of U.S. debt markets may call in to question the objectivity of U.S.-based rating agencies. These were the same rating agencies who missed the problems in real estate loans and derivatives in 2008.

As reported in this post, capital markets are increasingly becoming influenced by Asia and the capital being accumulated there. So it comes perhaps as no surprise that China has developed their own rating agencies. The leading rating agency is Degong Global. Degong downgraded the U.S. credit rating from AAA to AA+ in 2010. Some might speculate that the downgrade was politically motivated. Hard to believe that Degong, based in the most politicized capital market in the world--China, has much likelihood of being taken seriously.

Might be a good new business idea to start a rating agency based in Singapore or Switzerland where political interference would be minimal, no allegations of vested interest are likely and home country debt is not significant enough to affect ratings.

I found this story on Big Think, who found it on Mail.

 

Africa Looks Promising

Everyone is watching China and those of us in Miami are always focused on Latin America. With my work for OLPC I have been following Africa for the first time in my career. In the next 10-20 years I think that Africa could emerge as the new darling in emerging markets. My logic is in part based on these facts:

• Angola is the fastest growing economy in the world at over 10 percent per annum
• Demand for natural resources will increase dramatically over the next 10-20 years, which will benefit the resource rich continent of Africa
• China is investing large amounts of foreign aid in infrastructure in Africa
• Sources of capital are starting to focus on Africa, as evidenced by the FT report that Carlyle is setting up a private equity fund for the continent

Keys to the success of Africa will be whether it can develop its human resources and a middle class. Education and health services will be the important requirements to achieve these two objectives.

Interesting fact: Africa is a larger land area than China, the U.S. and Europe combined.

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Top 15 Media Outlets

Klout, which aggregates scores on the influence of social media users, has just posted a new list on the most influential users. NHK tops the list, probably due to the tsunami tragedy in Japan. Very interesting that Kompas and La Padilla make the list. Kompas is the largest newspaper in Indonesia. Maybe someone can comment on the home country of La Padilla. La Padilla offers pan-Latin America news in Spanish.

Complexity in Economic Development

One of the major problems in Latin America is a high drop out rate amongst students, which in some countries begins with graduation from primary school. In classic economic development thinking this problem has many dimensions:

1. Politics--unemployed youth can be easily encouraged to protest or join criminal enterprises
2. Social--uneducated youth are likely to enter a life of poverty
3. Culturally--uneducated youth frequently come from minority groups
4. Structural--uneducated, unemployed parents tend to have children with the same future
5. Economic--uneducated youth provide no economic contribution and may become a burden on the society

As you can hopefully see, this drop out problem can be analyzed in quite a complex way and the solutions developed typically incorporate this complexity to be responsive to all the objectives.

On the other hand consider the simple but elegant solution used by Mexico City’s Education Secretary Mario Delgado Carrillo. Mexico City pays a student $45 per month to stay in school and up to $65 per month if their grades are As or Bs. Payments are direct to the student through a bank card. In the program's three year history the drop out rate has decreased from 20 to 6 percent and grades have also improved.

Milton Friedman would be proud of this use of student self-interest to solve a problem. I particularly like the concept of meritocracy in higher pay for better grades.

I found the example of Mexico City in a story in the Miami-Herald by Andres Oppenheimer.

The two previous posts on economic development are here and here.

The views expressed here are my personal opinions and do not reflect the views of any organization with whom I am affiliated. 

Mexico City image credit

 

Cisco Strategy vs Huawei

Cisco, one of the leading U.S. tech companies, has lost favor with investors in the last twelve months, as shown below. Market share gains by Huawei, the Chinese leader in network switching equipment, has prompted the concern. Huawei dominates the China market, where demand for new equipment is very strong, and is trying to enter the U.S. and other global markets. Concerns about national security are slowing Huawei down in the U.S. but eventually their competitive pricing will prevail.

(SHE is Huawei. ERIC is Ericsson.)

The strategic issue for Cisco is very similar to what many American companies faced from Japanese competitors in the 1980s. Back then market leaders in Japan, unencumbered by strong local competitors, offered aggressively priced products as a means to enter the large U.S. market.

The companies in the U.S. who were successful in fighting off the Japanese entry fought the battle more in Japan than the U.S. Foreign companies with large domestic market shares use the resulting large cash flows to finance their foreign expansion. Attack your competitor in their home country and you reduce their cash flow for expansion. When you are the leader in a market and the competitor lowers prices you are forced to lower prices for all customers, which significantly reduces cash flow. Alternatively, one can give up market share, which companies rarely opt for, which again results in reduced cash flow. Disrupt the competitors in their home market and you reduce their cash flow for foreign expansion. 

Cisco needs to fight Huawei much more aggressively in the China market, offer pricing that is very competitive and probably accompany it with a better financing package. Chinese customers definitely have issues with capital availability and good pricing combined with financing could be attractive. 

Another alternative for Cisco is to pursue a strategy similar to Ericsson, whose stock has dramatically outperformed Cisco. See the chart above. Ericsson operates the telecom networks for carriers as an outsourced service, which I wrote about here. Providing outsourcing services to Chinese carriers might be an alternative for Cisco.

I found the story on Cisco here. The chart is from Google Finance.

Theories and Economic Development

This is the first in a series of posts on economic development, which was prompted by this post on multi-lateral banks.

Many people criticize academics for their pointless theorizing. I think there are three types of theories, all of which are very different, and not all types of theories deserve criticism:

1. Theories which are not intended to have any application in the real world. Philosophy or perhaps more specifically epistemology speculates on what is knowledge. Except for some esoteric applications of epistemology in artificial intelligence, nobody really cares too much about what is knowledge. Very few philosophers commit suicide in an attempt to prove that the world exists outside their mind. Philosophy and its theories are an example of a harmless body of theories of interest principally to those who like the subject (me included).
2. Theories which are intended to explain the real world. Math, science and finance would all be examples. For instance, the Black-Sholes formula is used by people every day to price options in financial markets.
3. Theories which are intended to explain the real world and only confuse the issues. Economic development theory is a case in point. I will illustrate my point through an exhibit, shown below. This chart shows in the left column the six sectors of economic development and across the top the eight dimensions of social inclusion, one and only one important objective of economic development. One could substitute education for social inclusion and create the same type of economic development matrix. (Ignore the numbers.) 

While I have not finished researching economic development theory, I do believe the matrix is representative of the current theories on economic development. If you want to know why foreign aid has no meaningful effect or why multi-lateral banks are only effective in building financial systems, imagine trying to design and manage a development project with this complexity of objectives. 

I will eventually present a theory of economic development that might be workable, but you will need to be patient.

 

(I have intentionally not footnoted where the exhibit above came from because I have no intention or desire to possibly embarrass in any way the people who prepared it, given the subject of this post.)

The views expressed here are my personal opinions and do not reflect the views of any organization with whom I am affiliated. 

What’s The Most Difficult CEO Skill?

Ben Horowitz is perhaps the most thoughtful and insightful VC blogger anywhere. His post What’s The Most Difficult CEO Skill? Managing Your Own Psychology was highlighted in a separate post by Fred Wilson. Fred may be the second best VC blogger around. My problem is I do not agree with what they say.

Horowitz states:

If you manage a team of 10 people, it’s quite possible to do so with very few mistakes or bad behaviors. If you manage an organization of 1,000 people it is quite impossible. At a certain size, your company will do things that are so bad that you never imagined that you’d be associated with that kind of incompetence. Seeing people fritter away money, waste each other’s time, and do sloppy work can make you feel bad. If you are the CEO, it may well make you sick.

And to rub salt into the wound and make matters worse, it’s your fault.

My problem with this statement is that it is a very self-centered view of the CEO. Yes, the CEO is ultimately responsible but where were the COO or CFO or CIO. A key to building large companies is to delegate responsibility. If you go crazy over money being wasted, for example, maybe you hired the wrong C-level executive. If you could not afford for some money to be wasted, you should have approved every contract or check. 

Horowitz said:

If someone was promoted for all the wrong reasons, that was my fault. If we missed the quarterly earnings target, that was my fault. If a great engineer quit, that was my fault. If the sales team made unreasonable demands on the product organization, then that was my fault. If the product had too many bugs, that was my fault. It kind of sucked to be me.

Being responsible for everything and getting a 22 on the test starts to weigh on your consciousness.

Getting a 22 on the test is not really important, as Ben knows. Staying in business and growing it are the important goals. I think back on the problems I went through managing a company in Asia:

1. The 1997 Asian Financial Crisis, when the currency devalued by 80 percent
2. Having all my bank lines cancelled
3. Having my lead bank twice cancel my bank lines
4. Having 7 store fires in three years, one of which occurred the day before a road show
5. Collecting a $30 million insurance claim from rioting in Jakarta
6. Wal-Mart entered the market

Wal-Mart really scared me and the store fires really concerned me until Kroll could find no evidence of a conspiracy to burn us out of business. After one or two total disasters you learn to roll with the punches and each subsequent disaster gets much easier to handle both psychologically and as a business problem. What we should probably teach CEOs is not to be really concerned until there are riots in the streets and/or they hear gunfire. Up until that point, just carry on, which was a point Horowitz made in closing his post.

Horowitz also made some good points about how to handle the stress of being alone at the top as CEO:

1. Make some friends with emotional maturity
2. Write about the problem; it may help you to separate the decision from your psychological demons
3. Focus on the road (stay focused on what is important)

I agree with the focus point. Absolutely critical and more critical as things get worse. I would add two recommendations:

1. Exercise more, it always helps to reduce psychological problems
2. It's therapeutic to look after the staff who may have bigger issues than you are experiencing; putting problems in perspective relieves stress