Fukuyama’s volume 1 is both deep in insights and broad in coverage. Rather than focus on a specific time-place (e.g. Renaissance Europe) or a specific issue (e.g. role of climate or germs or technology on history, etc.), the author uses comparative analysis across history to articulate nuanced interconnectedness of how geopolitical, structural and cultural conditions converge to shape the emergence of political institutions. The author masterfully breaks through the typical ad-hoc and stereotypical dining room table explanations to offer readers true insights. Not only is the book timely and informative but lucid for both serious and lay readers.

If you are intrigued by the following questions, I would highly recommend that you read this gem:

• Why did modern effective political institutions first emerge in Northern European states (England, Holland, etc.) over their larger and more powerful peers (e.g. France, Spain, Ottomans)?
• How did Spain lose its wealth, territories and super-power status while England, a relative second rate power, catapult to became a global hegemony?
• Why was the medieval Catholic Church critical in introducing Law in Western Europe, and why didn’t other major world religions play similar roles?
• Why did Imperial China fail to embark on a path to developing effective modern governments, despite having established a strong state early on?

In his “Das Kapital”, Marx argues that the capitalist’s pursuit of profit accumulation over time will increasingly lower wealth for the rest of the populace (workers or employees). This appropriation of wealth of the masses by a few is unsustainable and leads to class warfare. He elegantly frames the argument as follows:

•  The ultimate objective of commercial transactions in a capitalism economy is for a capitalist (investor) to seek profit, or what Marx calls a C–>W–>C’ transaction. (C is the initial capital invested by the capitalists, W is the  totality of labor/productivity contributed by the workers, and C’ is the net capital, or profit, reaped by the capitalists from the transaction). By necessity C’ > C in a capitalism economy.
• Marx argues that since capitalists seek ever increasing  capital accumulation, subsequent transactions over time must  appropriate greater amount of labor from the participating workers . This is illustrated in Figure below. In the initial transaction, the capitalist invests C1 and demands W1 in workers’ production capacity  to yield C2 in net capital. In future transactions, the capitalist invests C2 and demands W2 in workers’ production capacity to drive C3 in net capital. In order for capital accumulation (i.e. C3>C2), the workers must increasingly contribute more  labor (i.e. W2 > W1; proof by contradiction that C3 <= C2 for the curious).

The key to Marx’s argument  in above Figure is that W2 > W1 in a capitalism economy; participating workers must progressively contribute more of their labor capacity for a given wage from the transaction.  This effectively leads to wealth decrease for the workers and is ultimately unsustainable (i.e. when the demand on worker’s labor contribution W meets their production capacity L).

Marx’s argument fails to take into account one critical consideration: competition driven innovation and productivity increase, as depicted in  below Figure.

Over time, capitalist transactions drive improvement in worker’s productivity through technology and management innovation. This is necessitated by ruthless competition between capitalist entities for profit.  While successive transactions demand more from workers (i.e. W2 > W1), the worker’s production capacity has also increased (i.e. L2 > L1) .  The worker may not be worse off after all; over time, she can  complete a given  transaction and earn the corresponding wage while using up a smaller portion of her total production capacity (i.e. W2/L2 < W1/L1). If the capitalist attempts to extract a greater portion of the worker’s capacity without additional pay (i.e. further alienation of surplus value in Marx parlance), the worker can take her talent to a competing option in the market.  (One implication not explored in this article is the worker’s  need for increased knowledge and education to unlock  maximum production capacity).

In short , Capitalism doesn’t sow its own destruction. The capitalist pursuit of profit accumulation in a competitive market results in enhanced productivity. The resulting productivity increase  allows a worker to contribute more labor without increasing her “burden”.

The key question shouldn’t be what economic model can replace capitalism, but how can we better enable competition and innovation in a capitalism framework to accelerate productivity.

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Selected sources:  A Companion to Marx’s Capital; A Grand Pursuit – Story of Economic Genius

1. First strategic blunder: over-investing on a single high-risk growth platform, namely war. Despite having only a 30% success rate between 1520-1550, Spain persisted in doubling down good money after bad and waged campaigns with the French, the Ottomans and the Protestant German principalities. Spain’s war efforts led to a net negative cash-flow of ~$1MM ducat/year. For example, a single campaign against France in 1544 cost $2.8MM ducat, more than the entire estimated net profit stream from Peruvian silver appropriation. By the time Spain lost its Invincible Armada at the coasts of England in 1588, it was struggling with an untenable 0.7-0.85 debt-to-income ratio. Focusing on a single, risky growth platform prevented Spain from diversitying its (non-sustainable) colonial profit stream into other sustainable growth industries.
2. Second, Spain failed to adequately invest in its asset and capabilities (i.e. balance sheet). To provide one illustration, in the first decade after its colonization windfall, Spain made almost no investments in its domestic logistics infrastructure. By the late 1550′s, inland transport still relied on ox-carts and mule trains. Its lagging supply chain capabilities severely impeded Agriculture and Textile sector growth. In general, sub-optimal investment in infrastructure prevented Spain from developing foundational innovations to increase productivity and ramp-up the manufacturing value chain (a lesson that the British learned well as they embraced Mercantilism in the 1600-1700′s).
3. Lastly, Spain  failed to reform its  antiquated (Medieval) management operating model leading to ineffective policy decision making. Unlike the innovative Italian states or the emerging Dutch who employed professional bankers and merchants to devise investment strategies and economic policies, the Spanish Crown were hesitant to relinquish operational control and kept key management decisions “in-house”. Despite their “divine” status, the King and his high ranking nobles were likely lagging in financial and business acumen compared to the specialists such as the Fuggers, Welsers or Medicis.

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Selected sources: Conquest, Tribute and Trade; A Splendid Exchange

Business is often compared to war and statecraft, as reflected in  every-day  management jargon (e.g. competitive positioning, stick vs. carrot, war-gamming, etc). If business is war then merger and acquisition (M&A)  integration, also known as post merger integration (PMI), would be analogous to the capture and annexation of new principalities. In both scenarios, the acquirer must manage institutional complexity, cultural resistance and political machinations to  unlock economic value.

In his 16th century treatise on statecraft  ”The Prince”, Niccolo Machiavelli offered at least 4 pragmatic take-aways for leaders  to achieve success in governing new principalities. These case based insights are ever relevant for senior executives today in executing M&A / PMI in the global market:

(1) Ensure the  leader  is “on the ground” and actively managing  rather than over-relying on delegating (“…when states are acquired … especially those differing in language, customs, … one of the greatest helps would be that he who has acquired them should go and reside there. Because, if one is on the spot, disorders are seen as they spring up … [and] the country is not pillaged by your officials …)

(2) Stay tuned-in and forge alliance across the various business units of the target organization, not just with the executive class (“The Romans … observed closely these measures; they maintained friendly relations with the minor powers … for when the evils that arise have been forseen, they can be quickly redressed”)

(3) Manage and contain powerful stakeholders with different interests and agendas (“…and as if it were not enough to have aggrandized the Church, he wishing to have Naples, divides it with the King of Spain … thus King Louis (of France) lost Lombardy …”)

(4) Recognize that all else being equal,  a strong top-down directive led organization (e.g. Apple)  is easier to acquire and integrate than a bottoms-up decentralized organization (e.g.  partnership based law firm). (“…no one will marvel at the ease with which Alexander held the empire of Asia, or the difficulties which others have had to keep an acquisition, such as Pyrrhus … this is not occasioned by the ability of the conquerer, but by the want of uniformity in the subject state”)

Similar to ER physicians, senior executives often find themselves pressured to drive savings under a tight timeline. Specific challenges might involve delivering against an aggressive post-merger target; bracing for a worse-than-expected economic downturn; or enabling a rapid enterprise-wide transformation where early wins become the critical change catalyst. Companies often leverage an enterprise wide procurement transformation to seek efficiency and cut cost. However, a systematic  procurement initiative can often take well over a year to fully execute and deliver P&L impact.

Executives seeking to achieve rapid and high-impact benefits through their procurement initiatives should embrace three key takeaways from best-in-class ER physicians who both “do the right thing” and “do things right” in a hectic, time-pressured environment.   Read More

The key benefits of outsourcing stem from 3rd party’s ability to pool cross-firm volume and experience to achieve economies of scale (e.g. 3PL warehousing for CPGs; credit assessment for credit card companies) and economies of scope (e.g. product bundling in contract sale force).  However structural barriers can prevent capabilities from realizing scale benefits. For example, manufacturing in the food sector and early stage R&D in the pharma sector a are capabilities with structural barriers. As such, a third party “supply market” is slow to develop and companies must continue to pursue  in-house options on these “strategic” competencies.  Broadly, 4 key structural barriers can prevent an outsourcing option from materializing:

1. Process non-modularity: the ease of decomposing key activities and processes into sub-components for outsourcing. For example software testing is amenable to divide and conquer due to standardized, object oriented architecture. In contrast, early stage drug discovery is less modular since conducting biochemical experiments require tacit knowledge locked in the minds of the scientists.
2. Long capital payback: the capital investment intensity and risk required to establish 3rd party capacity. To illustrate, building microelectronics fabrication plants required a huge capital investment barrier that  initially prevented a 3rd party outsourcing supply market from developing.  It took a massive government subsidy and investment program in the 60′s/70′s in Singapore and Taiwan to finally catalyze the development of a global contract manufacturing market for the electronics industry.
3. Regional or fragmented consumer needs: A highly fragmented set of consumer needs or consumption pattern may limit the benefits from economies of scale and scope. For example, advertising in the used car sales industry enjoys modest economies of scale, compare to say marketing household consumer products, as most customers still search and shop for used cars using localized media.
4. IP appropriation risk: The ease by which differentiated assets or know-how can be protected through patents and other IP mechanisms if they are exposed to 3^rd parties. For example, outsourcing i-Phone manufacturing has low appropriation risk due to a strong thicket of technology patents. Outsourcing sales force for med-device has strong appropriation concerns since key physician (customer) relationships are typically with sales reps and not the parent institution.

Executives faced with making  decisions on the future direction of their firm must assess and anticipate trends (e.g. disruptive technologies, regulatory policies, changing or new customer needs) along the above four structural drivers that can alter the existing outsourcing vs. captive equation. The future scope and direction of the firm depends on it.

By expanding away from the core umbrella “CNN” brand to a portfolio of brands for individual “products”, CNN is trying to form deeper association and identification with its viewers through a sub-segmentation approach. By forming show-specific brands (represented by a distinct anchor along with a catchy tagline reflecting the show’s underlying theme), CNN has increased flexibility to target and reach sub segments of the viewer pool by enabling a more tailored messaging and content theme. In effect, each show (or brand) has the ability to fight its own battle against other networks’ shows targeting the same viewer sub-segments. For example:

- Wolf Blitzer (Tagline: Situation Room – Target viewers who want to get the latest critical and heated news of the day)
- Campbell Brown (Tagline: No Bias, No Bull – Target viewers with the differentiated message that the show is all about keeping the government and businesses straight by calling out mis-information and broken promises)
- Fareed Zakaria (Tagline: GPS or Global Public Square – Target wonky viewers interested in foreign policy and globalization issues)

Although an effective strategy, the “House of Brands” focus could also backfire in the long run: in particular it can potentially weaken the mothership “CNN” brand in the minds of viewers. In addition, the adopted strategy will continue to strenghen the “cult of personality” in U.S media and shift market power away from the network to the individual anchors.

“Financial markets were at first unsettled by the scandal of the Credit Mobilier, builder of the Union Pacific Railroad … then debilitated by the Northern Pacific, the mighty house of Jay Cooke failed on Black Thursday, Sept 18, 1873. The failure ignited a full blown Wall Street panic … Affairs continue unprecedentedly bad. Five thousand commerical firms and fifty-seven stock exchange firms were dragged down …” [Ron Chernow, House of Morgan]

If nothing else, the repeat of history and the trends in between suggests the following:

i) In the non-ending Red Queen race, the financial innovations, technologies and policies  will be insufficient to predict and manage the combination of human factors & secular market transformations that beget periodic market crashes.

ii)  Due to the acceleration of secular transformations  driven partly by globalization and technology, disruptions and  market crashes will become more frequent.

Going forward, volatility will be our ally.

Coined by Harvard business professor Clayton Christensen, the Innovator’s Dilemma states that often it is the very strength and core offering of the established incumbent that ultimately lead to their fall.

The favored incumbent (Hillary) spend most of her resources and focus on her core offering (i.e. Experience & Judgement) since this is what her customers (know hereafter as voters) both expect and demand. When a competing new-comer enters the market (Obama) he tends to bring a differentiated set of offerings (Change); having fewer resources and reputation with the voters, the new-comer typically cannot be competitive along the core offerings (Obama claiming he can match Hillary on Experience & Judgement). At first, voters are not willing to trade off the incumbent’s core offering for the new-comer’s new offering (i.e. choose Obama’s message of Change over Hillary’s message of Experience during the early primary days). Lulled by a false sense of security, the incumbent underestimates the new-comer and gives him breathing room to find a niche haven (Hillary not identifying and attacking Obama as the key threat during the early primary days). From his beach-head, the new-comer, over time, continues to refine and improve along both the new and core offering (campaigning on the key message of Change but also selling voters on his Experience & Judgement). As the gap along the Experience & Judgement dimension narrows between the incumbent and new-comer, voters all of a sudden place more value on the new offering dimension (i.e. Obama’s score of 100 on Change + 30 on Experience is more attractive than Hillary’s score of 100 on Experience alone). By the time the incumbent realizes her lagging position across the new offering dimension, it is often too late. Voters now want a mixed offering which the new-comer is more favorably positioned to provide.