Two books

I have just read two interesting books that seem to be counterintuitive or outside the box: The Innovator’s Dilemma by Clayton M. Christensen and Why Not? by Nalebuff and Ayres. Both books were highly recommended by Forbes and Businessweek (had to wait for the paperback edition.)

In Innovator’s Dilemna, Dr. Christensen, a Harvard Business School professor, writes as if it was a doctoral dissertation with a lot of empirical data and graphs to support his premise. (Translation: it lacks excitement with neither sex nor body count like the Da Vinci Code.) Having said that, its premise is very intriguing. Successful companies tend to miss out on disruptive technologies that eventually destroy these companies. 

Successful companies have their decision guides based on predictable market demands from their existing customers and therefore have conventional patterns of decision-making and road maps of growth and rates of return and investment parameters. However, disruptive technologies do not have predictable market sizes nor customers, middle managers or even top managers cannot in their right mind propose, much less invest in, these technologies. The good doctor suggests that only those that take bets in these technologies and create new organizations can survive these disruptive technologies. The book cited IBM’s PC skunk works in Florida, which helped ignite the PC revolution where Dell the PC maker is now creeping up to disrupt the mini-computers and eventually the mainframe. Another example is the disk drive where some companies thought the technology direction was bigger memory at lower cost, the direction of the market was really smaller size at a decent cost, not necessarily lowest cost. 

I guess the lesson we take away is that we should not always reject a new technology just because our current customers don’t like it. Another truism is to figure out what the customer does with your product and not what he says he does. Who knows maybe this technology may serve other customers? But whichever technology you choose, there is a need not to burden the startup technology by the current firm’s standard metrics and overhead loads.

Why Not? was a more interesting read. The book gave new approaches to creativity. Of course, the first step is to prevent everyone from saying, "If that’s such a good idea, why hasn’t someone already done it?" But why not? Some exciting ideas:

aa. Instead of having a firm state a price to customers, let customers state a price to the firm. Priceline, which patented this business model, based on this simple idea, had a market capitalization of $36 billion at the peak of the dot-com era, but today is still a $900-million enterprise from this idea.

bb. Instead of making dial-900 calls (this is a pay-per-call service in the US), consumers who have time on their hands can have telemarketers call them and earn some money while they hear the marketing pitch of these telemarketers.

From these readings, I can see applying some Why Not? ideas to the Philippines (not ranked in degree of impact or difficulty):

aa. Why not charge only one way for toll roads? The book described the case of the George Washington Bridge where only one way was charged twice the normal, but the return fare was free. The South Super Highway charges about P100 each way, if we apply the Why Not? Idea, the toll would now be P200 on the southbound only. The toll operator can now cut back on half its toll staff and operating cost of the air-conditioned tollbooths, as it now only needs half to staff the outbound. The bigger benefit is for the riders, as they will no longer be delayed by the long queues on the return. Then again, operating cost may not be the top-of-mind problem the toll operators are concerned with, it could be the humongous dollar debt load they have and their inability to price accordingly.

bb. Why not let buses, taxis, jeepneys and the MRT charge as they want? Currently the government dictates the ceiling prices of these transport modes. If they were allowed to charge themselves, the price might be lower. For example, if taxis charge too much, the riders would vote with their feet and start riding the MRT. If the MRT charges too much, then riders will decide to take the bus instead, but will have to compare the savings in time from traffic that the MRT delivers. The idea is to let the invisible hand of free markets dictate the price and not the subjective thought process of a government panel. Of course, this requires legislation that produces free market competition and not oligopolistic players who can dictate price.

cc. Why not increase a salaryman’s take-home and not the minimum wage? (Warning: this may be too radical for those who think inside the box and those without political will.)

a. Why not eliminate income taxes altogether for those earning P1 million a year or less? (Of course, you might need to increase the taxes of those earning more than P10 million a year). With 30 percent more disposable income, just watch what happens to your consumer spending and therefore your VAT returns.

b. Why not shut down whole government departments and rebuild from scratch? Taxes are a function of the government budget. Shrink the government and outsource most of the functions and I guarantee you the fiscal budget will go down. Why not harness all the excess good government workers (I have dealt with a lot of good ones) into a major BPO company that serves other governments worldwide? Can’t we get the US or UK to support this plan, since we are not asking for money but offering a value proposition? We just need some of their BPO contracts.

c. Why not eliminate the system loss charge in electricity?  Did you know every user is being charged P0.7145 per kilowatt for system loss? Or 15.8 percent of the generation charge per kilowatt. System loss was designed for reimbursement of the loss of electricity from theft or inefficient infrastructure. Why should the normal consumer pay for someone’s inefficiencies? If we apply simple logic, if this is reimbursed there is no incentive to fix. Someone should be held accountable and inefficiency not just passed through to the consumer.

d. Why not create prepaid power discount cards so there is no need to read the meter and bill and collect? Significant savings all around. For Meralco, no more meter maids, no more billing, no more credit problems. For consumers, a discount to encourage the use of these prepaid cards.

e. Why not restructure the metering system charge from a variable rate per kilowatt used to a fixed rate per month of say P50 per month? The consumer is charged P0.2435 for each kilowatt used. This is for reading the meter. For someone who uses say 1,000 kilowatts a month, this comes to P243.50 monthly or P2,922 a year. Does it really cost that much to read a meter that takes less than a minute to read? (This translates to a high-priced NY Wall Street lawyer charging $250 an hour reading my meter, hmm…) A brand new meter that can be read remotely could be bought for less than one year’s meter charge. We need to create incentive to save in the current structure both on Meralco’s side and the consumer’s. 

f. Why not review how electricity is charged? Maybe the ERC should do an overall review if the assets thrown into this RORB rate base are no longer a power plant, or if those same assets are now a successful mixed-use development.

g. Why not dismantle the inter-island freight system? It costs more to send a box of bananas from Davao than to New Zealand. We should invite competition and watch how our daily commodity prices go down because of lower freight.

h. Why not pay government officials the market rate as if they worked for a private company? The government can now compete for the best and the brightest. If the pay is low, there are only two types of government workers: the idealist who wants to give back and the corrupt who wants to take more. If the government’s position is a market-paying position, the pool of candidates increases. (My two cents... there is one caveat to this proposal, the penalty for corruption after this pay hike should be cutting off someone’s little finger like the Yakuza.)

My Two Cents. Let the invisible hand of market forces dictate price and behavior. Build competition. I can go on but unless we have leadership at every level of the government that is not afraid to make unpopular decisions and try new ideas like Bayani Fernando, our country will continue to have a downward spiral trajectory.

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Dickson Co is CFO (C is for Cheap) for Dfnn, Intelligent Wave Philippines and Hatch-Asia.com. For comments or suggestions, e-mail [email protected].