"You're being Manipulated": Ex CIA agent Andrew Bustamente

 

'There are a million business opportunities in the world'.

 

The Untold Realities of Pakistan: Kaiser Bengali

 

Why Costco is so loved

Keeping customers, employees and investors happy is no mean feat writes The Economist

image: getty images

Feb 15th 2024 

In the nearly 40 years that The Economist has served up its Big Mac index, the price of the McDonald’s burger in America has more than tripled. In that same period the cost of another meaty treat—a hot-dog-and-drink combo at Costco—has remained steady at $1.50. Last year customers of the American big-box retailer devoured 200m of them. Richard Galanti, Costco’s longtime finance boss, once promised to keep the price frozen “for ever”.

Customers are not the only fans of Costco, as the outpouring of affection from Wall Street analysts after Mr Galanti announced his retirement on February 6th made clear. The firm’s share price is 430 times what it was when he took the job nearly four decades ago, compared with 25 times for the s&p 500 index of large companies. It has continued to outperform the market in recent years. What lies behind its enduring success?

Costco is the world’s third-biggest retailer, behind Walmart and Amazon. Though its sales are less than half of Walmart’s, its return on capital, at nearly 20%, is more than twice as high. Charlie Munger, a famed investor who served on Costco’s board from 1997 until his death last year, called it a “perfect damn company”. Mr Galanti, who describes Costco’s business model as “arrogantly simple”, says the company is guided by a simple idea—hook shoppers by offering high-quality products at the lowest prices. It does this by keeping markups low while charging a fixed membership fee and stocking fewer distinct products, all while treating its employees generously.

Start with margins. Most retailers boost profits by marking up prices. Not Costco. Its gross margins hover around 12%, compared with Walmart’s 24%. The company makes up the shortfall through its membership fees: customers pay $60 or more a year to shop at its stores. In 2023 fees from its 129m members netted $4.6bn, more than half of Costco’s operating profits.

Joe Feldman, an analyst at Telsey Advisory Group, a research firm, argues that the membership model creates a virtuous circle. The more members the company has, the greater its buying power, leading to better deals with suppliers, most of which are then passed on to its members. The fee also encourages customers to focus their spending at Costco, rather than shopping around. That seems to work; membership-renewal rates are upwards of 90%.

Next, consider the way the company manages its product lineup. Costco stores stock a limited selection of about 3,800 distinct items. Sam’s Club, Walmart’s Costco-like competitor, carries about 7,000. A Walmart superstore has around 120,000. Buying more from fewer suppliers gives the company even greater bargaining heft, lowering prices further. By limiting its range, Costco can better focus on maintaining quality. Less variety in stores helps it use space more efficiently: its sales per square foot are three times that of Walmart. And with fewer products, Costco turns over its wares almost twice as fast as usual for retailers, meaning less capital gets tied up in inventory. It has also expanded its own brand, Kirkland Signature, which now accounts for over a quarter of its sales, well above average for a retailer. Its margins on its own-brand products are about six percentage points higher than for brands such as Hershey or Kellogg’s.

Last, Costco stands out among retailers for how it treats its employees. Some 60% of retail employees leave their jobs each year. Staff turnover at Costco is just 8%; over a third of workers have been there for more than ten years. One reason for low attrition is pay. Its wages are higher than the industry average and it offers generous medical and retirement benefits. Another is career prospects. The company prefers to promote leaders from within. Although Mr Galanti’s successor has come from outside, the rest of Costco’s executive team has been with the company for more than 20 years. The late Mr Munger was confident that Costco had “a marvellous future”. Its customers could be enjoying $1.50 hot dogs for many years to come. 

"I DON'T play GAMES": understanding what this really means

 

Inside Tony Blair Inc.

 

Economics Explained: Business Failure and Entrepreneurs

 The survival and success rates of new businesses can vary significantly depending on various factors such as industry, location, market conditions, management, and more. While I don't have access to real-time data, I can provide you with some general information based on historical trends and studies conducted prior to my knowledge cutoff in September 2021. It's important to note that these figures are approximate and can vary over time.

1. Survival Rates:

   • According to the U.S. Bureau of Labor Statistics, about 20% of new businesses fail within their first year of operation.
   • By the end of their fifth year, roughly 50% of new businesses no longer exist.
   • After ten years, around 70% of new businesses have closed down.

2. Success Rates:

   • Determining the success of a business can be subjective and depends on various factors, such as profitability, growth, market share, and individual goals.
   • Studies suggest that a significant percentage of new businesses may struggle to achieve sustainable profitability and long-term success.
   • Factors that contribute to successful businesses include a strong business plan, market demand for the product or service, effective marketing and sales strategies, financial management, and adaptability to changing market conditions.

It's important to remember that these statistics are generalizations and do not guarantee individual outcomes. The success of a new business depends on a multitude of factors, including the specific circumstances surrounding each venture. Entrepreneurship requires careful planning, market research, a solid business model, and continuous adaptation to improve the chances of survival and success.

--

Despite the challenges and risks associated with starting a new business, many people still choose to pursue entrepreneurship for several reasons. Here are a few factors that motivate individuals to start their own businesses:

1. Pursuing Passion and Independence: Many entrepreneurs are driven by their passion for a particular product, service, or industry. They desire the freedom to work on something they love and have control over their professional lives.

2. Financial Opportunities: Starting a business can provide potential financial rewards. Entrepreneurs may see an opportunity to create wealth, generate income, or achieve financial independence by owning a successful business.

3. Flexibility and Work-Life Balance: Some individuals start businesses to gain greater control over their schedules and achieve a better work-life balance. Entrepreneurship can offer the flexibility to set one's own hours, work from anywhere, and spend more time with family and pursuing personal interests.

4. Innovation and Creativity: Starting a business allows individuals to bring their innovative ideas and solutions to life. They may want to introduce new products or services, disrupt existing industries, or solve specific problems they are passionate about.

5. Personal Growth and Challenge: Entrepreneurship is a journey that provides opportunities for personal growth and development. Overcoming challenges, acquiring new skills, and taking on leadership roles can be highly rewarding and fulfilling for many entrepreneurs.

6. Autonomy and Decision-Making: Some individuals prefer to be their own boss and make independent decisions. Entrepreneurship offers the autonomy to shape the direction of the business, implement strategies, and build a company culture according to their vision.

7. Job Security and Control: In an uncertain job market, starting a business can provide a sense of security and control over one's professional future. Rather than relying on a single employer, entrepreneurs create their own opportunities and have a certain level of control over their destiny.

It's important to note that while starting a business can be appealing for these reasons, success is not guaranteed, as it requires careful planning, hard work, resilience, and adaptability. Each individual's motivations for starting a business can vary, and the decision to become an entrepreneur involves a unique blend of personal, professional, and financial considerations.

--

While starting a new business involves risks and uncertainties, it is not entirely comparable to buying a lottery ticket. Here are some key differences:

1. Control and Influence: When starting a business, individuals have a considerable degree of control and influence over the outcome. They can shape the business strategy, make decisions, and take actions that impact its success. In contrast, buying a lottery ticket is purely based on chance, with no control or influence over the outcome.

2. Effort and Skill: Starting a business requires significant effort, planning, and the application of skills and knowledge. Entrepreneurs must invest time, resources, and expertise to develop their business, whereas buying a lottery ticket requires no effort or skill beyond the act of purchasing the ticket.

3. Probabilities and Factors: The success of a business is influenced by various factors such as market demand, competition, industry knowledge, marketing strategies, financial management, and more. While the odds of success may vary, they are not entirely random like the odds of winning a lottery, which are typically extremely low.

4. Learning and Adaptation: Entrepreneurs have the opportunity to learn from their experiences, adapt their strategies, and improve their chances of success over time. They can acquire knowledge, seek guidance, and make adjustments based on market feedback. In contrast, winning the lottery is based purely on luck and does not offer the opportunity for personal growth or development.

5. Long-Term Potential: Starting a business has the potential for long-term sustainability, profitability, and growth. A successful business can provide a stable income and create value for its owners, employees, and customers over an extended period. In contrast, winning the lottery is typically a one-time event with no guarantee of long-term financial stability.

Success in business is influenced by a multitude of factors, including strategic planning, effective execution, market understanding, adaptability, innovation, customer satisfaction, financial management, leadership skills, team building, and more. While there are external factors and market forces that are beyond an individual's control, entrepreneurs have the ability to actively shape and influence many aspects of their business, increasing the likelihood of success through informed decision-making, hard work, continuous learning, and a willingness to adapt to changing circumstances.

Asra Nomani - Exposing Islamists

 

The Big Myth of Market Fundamentalism

 

Are CEOs with MBAs good for business?

 Daron Acemoglu in The FT

Every year, tens of thousands of aspiring young moguls enrol at business school for an MBA, hoping to climb the corporate hierarchy. They are following predecessors who now run many leading companies, from Alphabet, Amazon and Apple to Microsoft and Walmart. 

And the aim of faculty and administrators remains what Harvard Business School’s first dean, Edwin Gay, expressed in 1908: “To train people to make a decent profit, decently”. 

Better knowledge and training can make leaders more innovative and productive, raising the returns to all stakeholders. Better managed businesses can more effectively achieve whatever objectives they set, including helping to tackle the myriad challenges society faces. 

But has the MBA actually achieved these goals? Our recent research suggests a much less encouraging picture. Using detailed data on companies and workers from the US and Denmark, we looked at the effects when a chief executive with an MBA or undergraduate business degree takes over from one without such qualifications. 

We found no evidence that CEOs with such degrees increase sales, productivity, investment or exports relative to the levels the company achieved before. 

The biggest shift when a chief executive with a business degree takes charge is a decline in wages and the share of revenues going to labour, even in countries with different cultures. In the US, wages under business-degree holding CEOs were 6 per cent lower than they would otherwise have been after five years, and labour’s share of revenues was down five percentage points. In Denmark, the figures were respectively 3 per cent and 3 percentage points. 

We found no evidence that these were companies with declining sales and appointed leaders with business degrees to rescue them. The patterns are similar when new MBA managers are appointed following the death or retirement of a previous CEO. Nor was there any indication that by reducing wage growth, chief executives with business education were creating more retained earnings to fund investment, which is no higher in their companies. 

It may even be that, by ignoring broader stakeholders, such managers damage long-term profitability. For example, we found that higher-skilled employees were more likely to leave after the relative wage declines. 

However, shareholders gain from the appointment of a CEO with a business degree — at least in the short term. Share prices increase, and we see more share repurchases in the US and higher dividends in the US and Denmark. Business-educated managers are also paid more. 

The reason for the relative decline in workers’ wages and shareholders’ gain is clear. Companies run by CEOs without a business degree share increases in revenues or profits with their workforce — typically one-fifth of higher value-added. This ceases when a business-educated leader takes over. The wage impact is greater in concentrated industries. 

It is impossible to know for sure why business-educated leaders have these effects, but our work provides clues. One reason could be the legacy of the economist Milton Friedman’s doctrine from 1970, which stated that “the social responsibility of business is to increase its profits”. 

The idea that good managers raise profits is common in business schools and economics departments. Many courses advocate “lean corporations” or “re-engineering businesses” using digital tools to cut costs. It is possible that these ideas encourage leaders to take a tougher stance and ensure higher corporate profits are not shared with employees. 

Another factor may be that the majority of business degree students interact closely with each other and often have little contact with blue-collar and clerical workers. As CEOs, they may not see the viewpoint of the rank-and-file or consider workers as stakeholders. 

So is the current business school system broken? Not necessarily. First, only a small fraction of students become chief executives. Many work in other managerial positions, where their training may have very different implications. 

Second, the majority of the chief executives in our sample received their degree before 2000. Business schools today may have evolved, but there are not enough CEOs with more recent degrees to judge the effects. Indeed, schools do appear to have changed rapidly this century. Many now have ethics courses and prepare their students for diverse careers, including in government service and non-profit organisations. Many students learn about corporate environmental and governance responsibilities. 

Being aware of what managers with business degrees used to do is an important step in reflecting on how we can build better programmes. 

Third, and most importantly, there is nothing hard-wired about business degrees. What MBAs mean and achieve will change, often prompted by students themselves. If they demand an experience that is richer than the Friedman doctrine and that prepares them for today’s societal challenges, most schools will adapt. 

The change will have to start with what is taught in business schools, but it cannot stop there. The whole business school experience may need to be rethought, including how students socialise, form networks and gain experience. It will also have to involve a broader discussion of the social responsibilities of corporations and their business leaders.

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Welcome to the era of the bossy state

The relationship between governments and businesses is always changing. After 1945, many countries sought to rebuild society using firms that were state-owned and -managed. By the 1980s, faced with sclerosis in the West, the state retreated to become an umpire overseeing the rules for private firms to compete in a global market—a lesson learned, in a fashion, by the communist bloc. Now a new and turbulent phase is under way, as citizens demand action on problems, from social justice to the climate. In response, governments are directing firms to make society safer and fairer, but without controlling their shares or their boards. Instead of being the owner or umpire, the state has become the backseat driver. This bossy business interventionism is well-intentioned. But, ultimately, it is a mistake.
 
Signs of this approach are everywhere, as our special report explains. President Joe Biden is pursuing an agenda of soft protectionism, industrial subsidies and righteous regulation, aimed at making the home of free markets safe for the middle classes. In China Xi Jinping’s “Common Prosperity” crackdown is designed to curb the excesses of its freewheeling boom, and create a business scene that is more self-sufficient, tame and obedient. The European Union is drifting away from free markets to embrace industrial policy and “strategic autonomy”. As the biggest economies pivot, so do medium-sized ones such as Britain, India and Mexico. Crucially, in most democracies, the lure of intervention is bipartisan. Few politicians fancy fighting an election on a platform of open borders and free markets.

That is because many citizens fear that markets and their umpires are not up to the job. The financial crisis and slow recovery amplified anger about inequality. Other concerns are more recent. The world’s ten biggest tech companies are over twice as big as they were five years ago and sometimes seem to behave as if they are above the law. The geopolitical backdrop is a far cry from the 1990s, when the expansion of trade and democracy promised to go hand in hand, and from the cold war when the West and the Soviet Union had few business links. Now the West and totalitarian China are rivals but economically intertwined. Gummed-up supply chains are causing inflation, reinforcing the perception that globalisation is overextended. And climate change is an ever more pressing threat.

Governments are redesigning global capitalism to deal with these fears. But few politicians or voters want to go back to full-scale nationalisation. Not even Mr Xi is keen to reconstruct an empire of iron and steel plants run by chain-smoking commissars, while Mr Biden, despite his nostalgia for the 1960s, need only walk through America’s clogged West Coast ports to recall that public ownership can be shambolic. At the same time the pandemic has seen governments experiment with new policies that were unimaginable in December 2019, from perhaps $5trn or more of handouts and guarantees for firms to indicative guidance on optimal spacing of customers in shopping aisles.

This opening of the interventionist mind is coalescing around policies that fall short of ownership. One set of measures claims to enhance security, broadly defined. The class of industries in which government direction is legitimate on security grounds has expanded beyond defence to include energy and technology. In these areas governments are acting as de facto central planners, with research and development (r&d) spending to foster indigenous innovation and subsidies to redirect capital spending. In semiconductors America has proposed a $52bn subsidy scheme, one reason why Intel’s investment is forecast to double compared with five years ago. China is seeking self-sufficiency in semiconductors and Europe in batteries.

The definition of what is seen as strategic may well expand further to include vaccines, medical ingredients and minerals, for example. In the name of security, most big countries have tightened rules that screen incoming foreign investment. America’s mesh of punitive sanctions and technology export controls encompasses thousands of foreign individuals and firms.

The other set of measures aims to enhance stakeholderism. Shareholders and consumers no longer have uncontested primacy in the hierarchy of groups that firms serve. Managers must weigh the welfare of other constituents more heavily, including staff, suppliers and even competitors. The most visible part of this is voluntary, in the form of “esg” investing codes that score firms for, say, protecting biodiversity, local people or their own workers. But these wider obligations may become harder for firms to avoid. In China Alibaba has pledged a $15bn “donation” to the Common Prosperity cause. In the West stakeholderism may be enforced through the bureaucracy. Central banks and public pension funds may shun the securities of firms judged to be anti-social. America’s antitrust agency, which once safeguarded consumers alone, is mulling other aims such as helping small firms.

The ambition to confront economic and social problems is admirable. And so far, outside China at least, bossier government has not hurt business confidence. America’s main stockmarket index is over 40% higher than it was before the pandemic, while capital spending by the world’s largest 500-odd listed firms is up by 11%. Yet, in the longer term, three dangers loom.
High stakes

The first is that the state and business, faced by conflicting aims, will fail to find the best trade-offs. A fossil-fuel firm obliged to preserve good labour relations and jobs may be reluctant to shrink, hurting the climate. An antitrust policy that helps hundreds of thousands of small suppliers will hurt tens of millions of consumers who will end up paying higher prices. Boycotting China for its human-rights abuses might deprive the West of cheap supplies of solar technologies. Businesses and regulators focused on a single sector are often ill-equipped to cope with these dilemmas, and lack the democratic legitimacy to do so.

Diminished efficiency and innovation is the second danger. Duplicating global supply chains is extraordinarily expensive: multinational firms have $41trn of cross-border investments. More pernicious in the long run is a weakening of competition. Firms that gorge on subsidies become flabby, whereas those that are protected from foreign competition are more likely to treat customers shabbily. If you want to rein in Facebook, the most credible challenger is TikTok, from China. An economy in which politicians and big business manage the flow of subsidies according to orthodox thinking is not one in which entrepreneurs flourish.

The last problem is cronyism, which ends up contaminating business and politics alike. Firms seek advantage by attempting to manipulate government: already in America the boundary is blurred, with more corporate meddling in the electoral process. Meanwhile politicians and officials end up favouring particular firms, having sunk money and their hopes into them. The urge to intervene to soften every shock is habit-forming. In the past six weeks Britain, Germany and India have spent $7bn propping up two energy firms and a telecoms operator whose problems have nothing to do with the pandemic.

This newspaper believes that the state should intervene to make markets work better, through, for example, carbon taxes to shift capital towards climate-friendly technologies; r&d to fund science that firms will not; and a benefits system that protects workers and the poor. But the new style of bossy government goes far beyond this. Its adherents hope for prosperity, fairness and security. They are more likely to end up with inefficiency, vested interests and insularity.

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The Expert

 

Milton Friedman was wrong on the corporation

The doctrine that has guided economists and businesses for 50 years needs re-evaluation writes MARTIN WOLF in The FT

 

What should be the goal of the business corporation? For a long time, the prevailing view in English-speaking countries and, increasingly, elsewhere was that advanced by the economist Milton Friedman in a New York Times article, “The Social Responsibility of Business is to Increase Its Profits”, published in September 1970. I used to believe this, too. I was wrong. 

The article deserves to be read in full. But its kernel is in its conclusion: “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The implications of this position are simple and clear. That is its principal virtue. But, as H L Mencken is supposed to have said (though may not have done), “for every complex problem there is an answer that is clear, simple, and wrong”. This is a powerful example of that truth. 

After 50 years, the doctrine needs re-evaluation. Suitably, given Friedman’s connection with the University of Chicago, the Stigler Center at its Booth School of Business has just published an ebook, Milton Friedman 50 Years Later, containing diverse views. In an excellent concluding article, Luigi Zingales, who promoted the debate, tries to give a balanced assessment. Yet, in my view, his analysis is devastating. He asks a simple question: “Under what conditions is it socially efficient for managers to focus only on maximising shareholder value?” 

His answer is threefold: “First, companies should operate in a competitive environment, which I will define as firms being both price- and rule-takers. Second, there should not be externalities (or the government should be able to address perfectly these externalities through regulation and taxation). Third, contracts are complete, in the sense that we can specify in a contract all relevant contingencies at no cost.” 

Needless to say, none of these conditions holds. Indeed, the existence of the corporation shows that they do not hold. The invention of the corporation allowed the creation of huge entities, in order to exploit economies of scale. Given their scale, the notion of businesses as price-takers is absurd. Externalities, some of them global, are evidently pervasive. Corporations also exist because contracts are incomplete. If it were possible to write contracts that specified every eventuality, the ability of management to respond to the unexpected would be redundant. Above all, corporations are not rule-takers but rather rulemakers. They play games whose rules they have a big role in creating, via politics. 

My contribution to the ebook emphasises this last point by asking what a good “game” would look like. “It is one”, I argue, “in which companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; it is one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; it is one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises; it is one in which copyright would not be extended and extended and extended; it is one in which companies would not seek to neuter an effective competition policy; it is one in which companies would not lobby hard against efforts to limit the adverse social consequences of precarious work; and so on and so forth.” 

It is true, as many authors in this compendium argue, that the limited liability business corporation was (and is) a brilliant institutional innovation. It is true, too, that making corporate objectives more complex is likely to be problematic. So when Steve Kaplan of the Booth School asks how corporations should trade off many different goals, I have sympathy. Similarly, when business leaders tell us they are now going to serve the wider needs of society, I ask: first, do I believe they will do so; second, do I believe they know how to do so; and, last, who elected them to do so? 

Yet the problems with the grossly unbalanced economic, social and political power inherent in the current situation are vast. On this, the contribution of Anat Admati of Stanford University is compelling. She notes that corporations have obtained a host of political and civil rights but lack corresponding obligations. Among other things, people are rarely held criminally liable for corporate crimes. Purdue Pharma, now in bankruptcy, pleaded guilty to criminal charges for its handling of the painkiller OxyContin, which addicted vast numbers of people. Individuals are routinely imprisoned for dealing illegal drugs, but as she points out “no individual within Purdue want to jail”. 

Not least, unbridled corporate power has been a factor behind the rise of populism, especially rightwing populism. Consider how one goes about persuading people to accept Friedman’s libertarian economic ideas. In a universal-suffrage democracy, it is really difficult. To win, libertarians have had to ally themselves with ancillary causes — culture wars, racism, misogyny, nativism, xenophobia and nationalism. Much of this has of course been sotto voce and so plausibly deniable. 

The 2008 financial crisis, and the subsequent bailout of those whose behaviour caused it, made selling a deregulated free-market even harder. So, it became politically essential for libertarians to double down on those ancillary causes. Mr Trump was not the person they wanted: he was erratic and unprincipled, but he was the political entrepreneur best suited to winning the presidency. He has given them what they most wanted: tax cuts and deregulation. 

There are many arguments to be had over how corporations should change. But the biggest issue by far is how to create good rules of the game on competition, labour, the environment, taxation and so forth. Friedman assumed either that none of this mattered or that a working democracy would survive prolonged attack by people who thought as he did. Neither assumption proved correct. The challenge is to create good rules of the game, via politics. Today, we cannot.