When Industry Analysis Goes Flat

Barry Lynn, apparently some sort of John Kenneth Galbraith wannabe, has an amusingly cockeyed post over at the Harvard Business Review blog. He seems to think that state regulations protecting local beer distributors from vertically integrated competitors are the font of virtue, preserving needed diversity in the beer market by allowing craft and micro-brewers to get their product delivered. But if the big brewers were legally able (and motivated) to foreclose distribution of the small brands, they would be legally able to do it without vertically integrating into distribution (by requiring exclusivity).

A simpler analysis: When there were many  competing major brewers, independent multi-brewer distributors made economic sense, since they eliminated needless duplication of sales and delivery of all those brands to retail establishments. With the consolidation of the beer industry into two giant companies that own all the big brands (and a shift from on-premises to at-home consumption), a single-brewer distribution firm can now internalize almost all those economies. Then the beer industry starts to look a bit more like the soft-drink industry, where two major firms own and develop all the major brands and we don’t blink an eye at their bottler/distributors having exclusive relationships with the upstream brand owners or even being vertically integrated with them. If your local Costco or supermarket won’t carry a micro-brew or an off-brand soda, it’s unlikely to be due to market power on the part of the distributors.

UPDATE: It seems that AB InBev, owner of Budweiser and many other beer brands, is indeed shifting to more of a product innovation strategy and running into distribution problems with these new products:

“That’s not to say that AB InBev has perfected the process. Profit this year was hurt by higher distribution and administration costs in the U.S. as the brewer struggled to keep up with demand for Platinum and Lime-A-Rita, which required extensive — and expensive — countrywide distribution.”

So maybe there are strategic reasons why AB InBev would want more control over its distribution pipeline.

“Patents as Swords”? — More like Patents as Bombs

A great New York Times article this morning (link below) details ways in which the patent system gets used as both an offensive and defensive weapon, with billions of dollars of collateral damage to start-ups, consumers (see the “patent tax”), and innovation in general. The victim in the opening Vignette (Vlingo, a voice-recognition software start-up) might have been saved by a simple change in the rules: make the losers of patent lawsuits pay the legal costs of the winner. It turns out that it’s rather easy to kill small firms (or force them to sell to you) by launching a patent lawsuit against them that bleeds them dry with legal fees. You don’t have to win — you just have to force them to fight until they no longer have any money.  Vlingo ultimately won the patent lawsuit that had been filed by a much larger rival, but had to loot its own meager coffers to pay the legal fees of doing so. Vlingo slumped home with its patent lawsuit victory and shut its doors for good. If losers of such battles paid the legal fees of winners, such fights might both be less common, and less likely to be fatal.

The article also points out that software patents have proven particularly dangerous because they are prone to protecting vague claims like “a software algorithm for calculating online prices,” thereby granting the patent holder vast tracks of technological real estate. An interesting talk by Tilo Peters at the Strategic Management Society conference yesterday points to another useful tool for rationalizing some of this misuse of the patent system: Strategic disclosure. If, for example, you decided to publish a manifesto about all of the things you might do with software in the reasonable future (remember patents have a “usefulness” condition so you’re not allowed to claim something deemed non-feasible), you might be able to essentially proclaim that technological territory as unpatentable. It wouldn’t prevent competitors from developing in those areas, but it could keep them from patenting in those areas. In essence, it transforms a space in which property rights may be allocated into one in which property rights may not. I’ve left out some details but you get the idea.

Now it occurs to me that a fair amount of strategic disclosure in the smart phone space took place in the form of Star Trek episodes. I’m going to go look for references to prior art…

-Melissa Schilling


Alex Tabarrok’s Patent Policy napkin

Alex Tabarrok's Patent Policy napkin

Alex Tabarrok’s pictorial commentary on patent policy, drawn on a napkin, posits that the current patent system is somewhat too strong and thereby decreases innovation (the link to his original post is below). I have to say, however, that I don’t think patent strength is the problem. The problem is that the growth in patent applications over the last two decades has vastly exceeded the growth in resources available to the patent office, resulting in 1) long delays between patent application and granting (which can render patents completely pointless in fast moving industries), and 2) inadequate ability to examine the patent applications for novelty, usefulness and non-obviousness. This lowers the value of good patents (because they aren’t granted quick enough or may be fallaciously challenged) and increases the likelihood of bad patents being granted. As a result, for many individuals and firms, the expected net gains from manipulating the patent system for the purposes of extortion (hostage taking, patent trolling) now exceeds the expected net gains from using the patent system to actually innovate.

It’s difficult to assess how patent strength affects innovation without first making sure that patents are being granted and used the way the system had originally intended.

Alex Tabarrok’s original post can be found here:  http://marginalrevolution.com/marginalrevolution/2012/09/patent-theory-on-the-back-of-a-napkin.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

Healthcare Price Control Shuffle…

Romney and Ryan have incorrectly characterized Obamacare as a “Raid on Medicare” and news organizations and the Obama campaign have fired back that is it actually a program to reduce healthcare costs — an important achievement of the administration. This whole discussion misses the fundamental point that $716 billion in savings would be the result of mandated price controls. Given that this is a major intervention, it is important to understand how these altered incentives will affect the U.S. healthcare system.

Medicare currently pays providers 30% less than private insurers and Obamacare will further reduce that to save $716 billion in payments to providers (hospitals, doctors, etc.). At the same time, broader coverage (another goal of the new law) will undoubtedly increase demand for services. How will these effects play out?

We already know that some providers are less willing to accept Medicare Read the rest of this entry »

Excessive government paperwork–meta edition

An earlier post described the sclerotic impact of excessive regulatory documentation requirements on real-estate development projects. it turns out that the private sector isn’t the only victim of this tendency:

I think we all know what the logical response to the GAO meta-meta-study is…

H/t Instapundit.

The History Tax

Try to guess the context for this piece of writing. Is it part of a scholarly study on the history of convention centers? A tourist guidebook? Is it the catalogue to a museum display on convention-center architecture?

In order to attract growing numbers of conventions in the
second half of the twentieth century, cities incorporated
convention center construction within urban renewal and
redevelopment schemes, usually at the edge of core urban
areas where space would be available for construction of
large buildings with contiguous, flat-floor space.

Read the rest of this entry »

MBA tuition bubble update

If you want to see just where the MBA business may soon be heading, read this – just in from Balkinization (HT: Instapundit): The Law School Crunch Is Here–Finances and Quality to Suffer. New numbers released by LSAC show applicants to law school for 2012 are down in every region of the US vs. previous year, with the majority experiencing drops of 15%-20%. Enrollment is also dropping – 2012 may see the lowest enrollments since the 1990s (from 52,000 enrolled in accredited programs two years ago to a possible 43,000 this year). With such a precipitous enrollment drop comes low quality students and severe financial difficulties. The bad news is that even at these low numbers, the number of graduates far outstrips the number of available jobs. Tamanaha estimates the equilibrium number of first year enrollments to be around 35,000. The good news is hard to find.

The law school industry appears to lead its b-school counterpart by a few years. Many of the trends affecting law schools – the most salient being the discouraging cost/benefit ratio facing prospective students – are also affecting graduate business schools. The lag between the two may be due to the fact that, for law schools, the immediate value of a law degree is much more transparent. One cannot be a lawyer without a law degree and the only purpose in having a law degree is to become a lawyer. When the bottom falls out of the market for lawyers, one would expect it to fall out of the market for law education in short order. Since MBAs are, ostensibly, useful in any business endeavor, the connection between the education and practitioner markets is less obvious.

That said, business schools face other challenges. For example, law schools still provide an important certification function and, as such, have presumably retained a requisite level of educational content. This maintains their position as a necessary link in the professional chain. Business school educational content, on the other hand, has been on a downward glide path ever since the advent of Business Week surveys in the late 80s (and the Northwestern response innovation to treat students as “customers”). With no objective certification requirement, b-schools have been free to dumb down the education, admit large numbers of questionably-qualified-but-able-to-write-a-check students, and increase activities that have little to do with learning (e.g., social networking). Simultaneously, we see the stirrings of competition from untraditional  sources, such as high quality schools in Europe, China and India (previously a growth segment of the domestic MBA education market), free online courses from top schools such as MIT and Stanford, and alternative forms of education (such as E[enstitute]‘s apprenticeship approach). These differences suggest that the bottom, when we hit it, may be worse than that for law schools.

During a discussion of these developments the other day, a young colleague objected to (what he interpreted as) my Cassandra-like apocalypticism on this topic. The objection was misplaced. I do believe the market for MBAs is going to get a lot tougher in the near- to mid-term – perhaps catastrophically so for programs outside the first tier. In the long-term, however, the turbulence is going to force our institutions … wait, I mean us, the faculties … to revise our business and educational models to compete effectively. The reason to start thinking about the bad-news scenarios now is to prepare. So, when the crunch comes, clear-thinking colleagues can step up to implement successful responses. In my judgment, the market for business education is going to become much more fragmented and diversified. This strikes me as a good thing, with one  winning strategy being to take the research-education link and its attending certification role seriously once again. And, that, in my opinion, would be a wonderful development.

Urban Strategy Fads

Mario Polese provides a nice short history (up to the present) of oversold urban revitalization strategies in City Journal. Interestingly, these theories succeed with municipal decision makers for the same kinds of reasons that pop-strategy notions flourish with company managers: They fit the zeitgeist, they flatter the preconceptions and prejudices of the decision-making class, they claim to magically bypass the obstacles to success, and they enable the rent seeking of powerful coalitions. Their obvious theoretical and empirical drawbacks as all-purpose nostrums have little effect on their propagation, and their promoters often flourish despite a complete lack of proven efficacy.

One useful thought exercise for assessing urban development strategies is to imagine yourself the monopoly landowner in a city and think about what policies would maximize the value of your holdings (or rent stream). It quickly becomes apparent that for cities of any size or complexity, your chances of picking sectoral, much less firm-level, “winners” are very low, unlike the owner of, say, a shopping mall. The peculiar difficulty is that cities have both the “internal” complexity of closed systems and the “external” complexity of open systems in a turbulent environment.

Centrally planning complementarities and synergies within the city overwhelms the monopoly landowner’s knowledge and modeling prowess, because 1) the interactions are manifold and hard to decompose and 2) the city itself is what Hayek called an order (or cosmos) with different people pursuing different objectives, not an organization (or taxis) where a single hierarchy of objectives can be imposed; the denizens of the city don’t work for the landowner and are not deployable resources. The best you can do is provide the most effective sector-neutral institutions and infrastructure you can think of given your geographic and historic legacy. Any “natural” advantages a city has in specific sectors can be accommodated by policy (e.g., tourism-friendly policing in a natural tourist area), but trying to create such advantages from scratch seems foolhardy.

Deliberately positioning the city as a competitor against other cities then becomes something of a fool’s errand. The very sort of maneuverable, focused tradeoff-making needed to pursue competitive “good strategy” as an open system with shared objectives (a taxis) in a turbulent environment conflicts with the efficient policy neutrality needed to manage the city’s internal complexity as a cosmos.

Interesting question: How big does a piece of land have to be before planned synergy-mongering and focused strategy should give way to neutral governance? There are large master-planned communities put up by real-estate companies that include residential, commercial, and office components. I conjecture that that size is about the limit of effectiveness for guided, synergy-conscious development strategy.

Open-source licenses annoy almost everyone

The title of this post is from the opening line of this article: McGowan, D. 2011.  The Tory Anarchism of F/OSS LicensingUniversity of Chicago Law Review.

The article goes against current academic wisdom (Lessig et al) and argues that freedom actually gets restricted in open source licensing — specifically the freedom of authors (rather than users).  An interesting piece, worth reading.  Here’s the abstract:

This Article uses the example of free and open-source software licenses to show that granting authors relatively strong control over the modification of their work can increase rather than impede both the creation of future work and the variety of that work. Such licenses show that form agreements that enable authors to condition use of their work on the terms that matter most to them may give authors the incentive and assurance they need to produce work and make it available to others. Such licenses may therefore increase both the amount of expression available for use and the variety of that expression, even if enforcement limits the freedom of downstream users. These facts give reason to oppose recent decisions that make license terms harder to enforce through preliminary or permanent injunctive relief.

Organizing entrepreneurial judgment: a must-read book

O&M’s Nicolai Foss and Peter Klein are publishing a book (forthcoming in early 2012) Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge University Press.  Their book starts with the premise that “the theory of entrepreneurship and the theory of the firm should be treated together.”  I agree.

So, if you want to read up on the latest and greatest at the nexus of entrepreneurship, organizations and markets – then this is definitely the book for you.

Here is the table of contents.

1. The need for an entrepreneurial theory of the firm
2. What is entrepreneurship?
3. Entrepreneurship: from opportunity discovery to judgment
4. What is judgment?
5. From shmoo to heterogeneous capital
6. Entrepreneurship and the economic theory of the firm
7. Entrepreneurship and the nature and boundaries of the firm
8. Internal organization: original and derived judgment
9. Concluding discussion

I haven’t quite read the whole book, yet, but am working through it.  So more posts to come.

#OWS 2011 = Paris Commune 1789

A shot across the bow in the New Criterion by James Panero:

For those of us who watch from the sidelines, the Occupy Wall Street movement may appear sympathetic to our own concerns. At the very least, it seems to offer a safety valve for others to vent their frustrations. Yet the history of idealistic occupations suggests this will also end poorly, with a polarized public and the movement collapsing in ruin.

Like the Commune, Occupy Wall Street is about the perfection of itself rather than the reform of others. This is a reason that the Occupationists differ from other protesters who go home at the end of a long march. For the Occupation, the tents do not come down until perfection is attained or destroyed.

The heart of OWS is therefore in its internal mechanics, especially its strictly “non-hierarchical” code of conduct. The manifestations of this code might appear foolish, but they emerge from a formula meant to challenge if not supplant our current system of government with the Occupation’s own forms of egalitarian command and control, a formula that grOWS ever more doctrinaire and insular for those who practice it. Many of these devices are still being developed in the “General Assemblies” of Occupationist cells. OWS already employs several to limit open speech, especially when the purity of the Occupation is confronted by the impurities of our existing laws and precedent.


From my perspective the reason why the “free/open source” movement succeeded is because they stopped protesting and started coding – i.e. they focused on developing solutions.  Richard Stallman created two brilliant hacks – the GPL – an IP license that allowed sharing & GCC – the compiler.  Solutions not protest!

Patent inflation

The most recent issue of Yale Law Journal has a nice piece by Jonathan Masur on patent inflation (here’s the pdf).  There’s no question the system is broken: patent thickets are a problem, anticommons are an issue, and some patents are plain ridiculous.

The piece is worth reading – it covers Bilki’s attempt to patent hedging risk, the problem of assessing usefulness and novelty, the scope of what is patentable, the problem of patenting process and software, etc.

Here’s the abstract:

For more than two decades, the Patent and Trademark Office (PTO) and the Federal Circuit have exercised nearly complete institutional control over the patent system. Yet in recent years their stewardship has been widely criticized, largely on the basis of two particular failings. First, the PTO grants significant numbers of invalid patents, patents that impose substantial costs on innovative firms. And second, over time the Federal Circuit has steadily loosened the rules governing patentability, allowing ever more patents over a greater range of inventions. This Article argues that both of these modern trends may be attributable in whole or in part to the asymmetric institutional relationship between the PTO and the Federal Circuit. If a patent applicant is denied a patent by the PTO, she can appeal that denial to the Federal Circuit. However, if the PTO grants the patent, no other party has the right to appeal. Accordingly, the PTO can avoid appeals and reversals, both of which are costly in monetary and reputational terms, simply by granting any patent that the Federal Circuit might plausibly allow. Because the PTO will grant nearly any plausible patent, the vast majority of rejected applications that are appealed to the Federal Circuit will concern boundary-pushing inventions that are unpatentable under current law. Occasionally, a particularly patent-friendly panel of Federal Circuit judges will elect to reverse the PTO and grant a patent that the Agency has denied. The Federal Circuit’s decision will create a new, inflationary precedent. The boundaries of patentability will expand slightly, as this new precedent exerts influence on the other circuit judges. And as the Federal Circuit’s conception of what may be patented expands, the PTO will similarly inflate its own standards in order to maintain an adequate margin for error and avoid denying a patent that the Federal Circuit is likely to grant on appeal. Patent law will thus be subject to a natural inflationary pressure.

A patent for a strategy framework?!

I love that there are patents like this – an IBM patent for “an integrated framework for analyzing a firm in terms of its resources, capabilities and strategic positions, providing a Strategic Capability Network composed of nodes signifying these resources, capabilities and strategic positions, together with relationships between these nodes.”

Here are the full details on US patent # 6,249,768 at google patents.  Read through the patent document – it is inclusive of citations to work in SMJ and other journals.  And, this particular ‘strategy’ patent has also been referenced by many other patents.

And, here are other patents that cite SMJ. Here’s one for an “organizational innovation enhancement technique.”

Crowdfunding and the Law

A quick update on the previous post – Bainbridge provides some links related to crowdfunding and the law.

Bus Law Prof has details on the House bill that “would establish a federal securities law exemption for crowdfunding.” For a good introduction to the phenomenon, see Crowdfunding of Small Entrepreneurial Ventures. For an excellent summary of the key legal issues, see Steve Bradford’s Crowdfunding and the Federal Securities Laws.

Strategic analysis of strategist certification

At the recent Strategic Management Society meetings in Miami, I attended a session devoted to creating an SMS strategy certificate. (Apparently this is an ongoing initiative that started a year ago or so, although I hadn’t been paying attention.) The idea is to offer a written exam that consultants can take (for a fee) in order to become SMS-certified strategists. (I would put in links to the SMS website for all this–they even have a forum where members can view the tentative list of exam topics and leave comments–but the hamsters that power the site appear either to be on strike or allergic to Chrome.)

My first reaction to this proposed exam was to be reminded of the old story about the grocer who observes a shopper sniffing the meat for freshness and responds, “Lady, could you pass that test?” They had a laundry list of topics forming a kind of core and then planned “electives” in different specialized areas of strategy. Many of the topics are things I’ve heard of but don’t know much about. Others are things that I know about but believe to be vacuous or fatally flawed. It looked like a flat-file version of one of those giant multicolored management textbooks used by undergraduate business majors, which have always depressed me with their pretension and lack of coherence. I’m not sure if I espied Miles and Snow’s categories among the topics flashing by on the Powerpoint, but they did have SWOT analysis, generic strategies, the BCG matrix, vision/mission statements, and a variety of other forms of management Laetrile. Can you imagine being certified in SWOT? In vision statements? It’s almost as embarrassing as Louisiana’s tests for licensing flower arrangers that were mostly repealed under pressure from the Institute for Justice.

Perhaps to maintain buy-in from the heavily academic constituency of SMS, the program is being sold as having no effect on academic curricula or research. The influence is supposed to go entirely from academia to consulting and practice, with no one’s course being pressured to meet the certification content.

It was a peculiar meeting in the Neptune room of the Loews. A working group had been beavering away on a proposed curriculum for a year and was ostensibly soliciting our feedback, but 1) didn’t want to engage in the specifics of what they had come up with and 2) didn’t really want to address the basic question of whether the whole enterprise makes sense. Those in charge took notes on what the people in the room said but it felt like one of those government “request for public comment” setups, where the fix is in and no meaningful reconsideration of the project is possible. One person told me afterward that he had never been in a meeting with such an undercurrent of fear and suppressed tension. There was indeed a whiff of preference falsification in the air.

I was as diplomatic as possible, but expressed some of my concerns. Afterwards, a few people commented to me that they thought that this was a terrible idea but had expected/hoped that its intrinsic hideousness would have killed it off by now. I see no signs of such a spontaneous abortion. Rather, the meetings keep going on and the “process” keeps rolling forward, despite the instantaneously queasy feeling it causes in everyone with whom I discuss it.

Why would the SMS want to do this?

Read the rest of this entry »

Michael Heller on property rights and the anti-commons

Here’s a provocative talk by Michael Heller about the problems of private ownership. Here’s the related piece: Heller, M. 1998. The tragedy of the anticommons: property in the transition from marx to markets. Harvard Law Review, 111: 621-688.


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