Fun Times with Business

I found Pili Vega’s blog post on gender market segmentation very interesting. Her article describes a new chocolate bar product, specifically made for women, and intended to deal with women’s higher « health consciousness. » She is not certain about this being an efficient strategy, because she believes the chocolate bar could have instead tried to appeal to health conscious men AND women. More broadly, she also questions marketing practices that involve market segmentation based on gender « stereotypes. »

In my opinion, this type of product will lead to better sales than a more gender-generic product. Indeed, health-consciousness based on weight is typically a female issue, for many reasons. It’s not just a stereotype, it’s actually true. As such, the female segment is much larger than the male segment for low-weight products, and it is a more interesting marketing strategy to try to greatly appeal to that bigger market rather than catch less of both market segments.

Marketers do not base their decisions on false stereotypes. Marketers actually read psychology and sociology studies frequently. I think we should be wary of hastily dismissing gender preferences. This article from The Fiscal Times, « Five Marketing Myths About Women Debunked » makes such a mistake. Indeed, a good part of this « debunking » article actually relies on irrelevant studies. For instance, it cites a report that is supposed to show women don’t like pink more than men. And indeed, according to it, women’s favourite color is blue. But the survey’s methodology shows that pink was not part of the list of colours to choose from. And in fact, purple was the favourite colour for 23% of women… but it wasn’t any male’s favourite. It’s not all silly stereotypes.

You have probably browsed websites such as Samsung Nation or Yahoo! Answers that had point systems, badges to earn and leaderboards to compare yourself with others. Or perhaps you tried out the FourSquare app for iPhone and earned achievements for logging it at UBC. You might have also participated to GreenPeace’s new game elements.

 Wherever you have been on the Internet in the past two years, there’s a fairly high chance you have encountered one of these things. This process, known as « gamification »,contributes to making users more motivated and engaged in the services they are using.

As someone interested in both video games and business, I find gamification fascinating. The goal of gamification is to add game-like elements, such as points, quests, badges, leaderboards, achievements, competition, teamwork and more to non-game environments.  The objective is to increase the motivation and interest of the « players ».

Gamification actually works, and is becoming more and more popular. It is now at the core of most successful web-based businesses and services. It makes people more interested, participate more, learn better… and it makes employees more productive, too!

It is more complicated than it seems, though. I can’t explain it all here, but if you are interested, I invite you to check out this article by The Economist or Kevin Werbach and Dan Hunter’s new book, For The Win. I discovered gamification through a very interesting set of lectures on Coursera.

Today, friends from my French university showed me a fairly shocking article from BFMTV, an important news source in France. This article, amongst others in French media, explains that Starbucks has not paid any taxes on profit in France since its installation in the country. A similar article in English can be found on The Guardian’s website. Indeed, Starbucks has apparently been using the same tactics in the United Kingdom and other european countries. In 2011 in France, Starbucks recorded net losses of €2.5 millions… but told investors in France it actually earned a profit.

How does Starbucks manage to record net losses? Apparently, Starbucks’ fiscal optimisation relies on heavy cash flows between different regional organizations, in the United States, in Netherlands or Switzerland. This allows the company to pay little to no taxes thanks to well-used optimisation.

This directly ties back to our class on business ethics: is it ethically acceptable for a firm with such tremendous profits as Starbucks to continiously avoid taxes thanks to clever financial operations? I personally found these articles shocking. A company is expected to give a part of its earnings to the State and population that host it. But Starbucks does not seem very willing.

I was reading other people’s blog posts today and stumbled upon this article by Fred Ho, Would you choose $1000 today or $1013 in a year?

In his article, Fred explains he preferred to have $1200 in a year rather than $1000 today because of inflation (about 3% a year in Canada). He considers that $1000 today is worth the same as $1030 next year, ceteris paribus ; as such, any offer above $1030 should be taken.

While this makes sense, and if I understood the article correctly, it does not take into account the main point of the concept of present value. Present value is simply the value of a given amount at a set t time in the future for a set i interest. It is very used in finance, for instance when calculating bond value, because a company that issues a bond only knows how much it will pay for the bond, not how much it will get for it. As such, if I’m given $10000 in one year and want an 8% interest, I will buy it for about $9259.

Thus, the point of present value as I understand it is simply to obtain initial investment required to get a given sum of money for a given interest. That’s why it doesn’t take inflation into account. For that reason, I don’t think it should be used in examples such as “Should I take $1000 now or $1200 in a year?” because such a question involves many other factors than simple interest calculations.

The website Coursera, which my readers have probably heard about, is a great example of modern social entrepreneurship. It’s not about micro-finance, it’s not about helping the poor nor is it about supporting African agriculture. It deals with providing top-quality university lectures to people all over the world, for free. It includes famous and renowned university participants such as Stanford University, Princeton University or even… UBC, which recently joined up.

Coursera’s mission is, as seen on their website and as can be interpreted as their mission statement, “to give everyone access to the world-class education that has so far been available only to a select few. We want to empower people with education that will improve their lives, the lives of their families, and the communities they live in.”

Quite an ambitious mission, but it seems to be working fairly well for now. 33 universities over the world have partnered with Coursera and offer very high quality contents to anyone who wishes to learn… for free. I personally took a gamification course by Kevin Werbach, a business expert specialized in internet & communication technologies and associate professor at the University of Pennsylvania. The course was very interesting, well documented, and very useful!

Our lecture on social entrepeneurship as well as the readings we were given prior to class got me thinking about the best way to define social entrepreneurship. As the class went on, it seemed like what I had been reading before class in the Stanford Social Innovation Review contradicted what was taught in class. Is social entrepreneurship different from a non-profit, is it always for-profit, is it different from a charity, what are its inherent characteristics?

During our lecture, speakers argued that social entrepreneurship was very different from other non-profit organizations with social goals, and from regular businesses. The main differences pointed out were different motivations — social benefit instead of profit and personal gain — while keeping a business-like, sustainable revenue model. Meanwhile, the authors of the Review’s article argued that the inherent difference was based on the value proposition itself, focused on social gain rather than profit (to make it simple).

Who’s right? I believe speakers in class put form over substance, and it should be the other way around. Mozilla is a good example of a social entrepreneurship, and it actually combines a non-profit foundation with a for-profit  corporation, the latter being fully part of the former, and revenue never leaving the association. It has a sustainable business model, makes money from contracts with Google… but accepts donations and never provides any money to its owners. That is substance over form: social entrepeneurship cannot be opposed to non-profit or for-profit, or other criteria ; it all depends on our evaluation of whether that business’s first and foremost goal and motivation is social benefit, or not.

In an article written for Business Week, Josh Tyrangiel tries to defend income inequality in the United States by bringing up the concept of “opportunity”. This article, titled The Inequality Incentive claims that inequality can be beneficial because it incentivizes people to do better and to seize extraordinary opportunities, thus sometimes becoming wealthy and powerful, like Goldman Sachs’s chief executive officer, which the author uses as an example.

As such, income inequality in the US, which is about as high as that in China and just below that in Brazil according to the Gini coefficient, can be useful and give people incentives to seize opportunities and be as innovative as possible. He tries to show that these “extremes” have benefits and are part of American values.

To me, this is very far from true. This is a typical, yet very sad, example of “trickle-down” economics, which is the idea that guaranteeing high income to the wealthiest in the population (with tax cuts for instance) will ultimately serve the interests of the poorer parts of society. That statement is economic nonsense, and is actually based on very little except “incentives”. Now of course, incentives are a good thing and inequality can be healthy. But not extreme inequality. There can be differences, but not as high as those in the US. Extreme inequality does not bring incentives, it brings demotivation and abandon.

Finally, one conceptual framework which can be used to argue against trickle-down economics is utility: considering that marginal utility brought from income decreases as income increases, an ideal society where global utility is at its highest would actually be completely equal… which is the opposite of the society the author defends. This point of view is classically defendedby utilitarianism.

An article published by the student association I’m a part of, Inside Electronic Pipo, inspires this blog post. It’s a short article about WhatsApp, an iPhone and Android application that allows people to send messages to other users of the app for free.

WhatsApp is on the iTunes Store for €0,79 in France and is second in the “Most Sold” top 10 for paid apps in France and Canada. People use it to send texts to other smartphones for free and effectively replace traditional texting services, because it’s much cheaper.

WhatsApp is seen by some as something really new and innovative, but it’s actually a simple messenger service, like MSN, Yahoo! Messenger, ICQ, AIM or even Skype… except its marketing strategy is different. Their value proposition is not to provide a “free online messaging service” but to provide “free texting” (roughly). Thus, WhatsApp provides exactly the same things as those services, but focuses on making it similar to texting (by using the device’s ID as identification instead of having a username, etc.) to offer something “different”. WhatsApp, and similar apps on the iTunes and Android Stores, are a great example of how a good marketing plan can make a product successful, even if it’s similar to current offer.

With the release of the iPhone 5 and iOS 6, Google Maps has been removed from every iPhone, and replaced with Apple’s new Map service. Apple had been working on this for quite some time now, but Apple Maps did not meet expectations of customers, especially compared to Google’s.

It is so bad that Tim Cook apologized to customers, and Apple is now suggesting other independent iPhone apps to customers to replace their poor service.

This is a major downside of the iPhone 5, and from a business point of view it is not a good thing at all for Apple. iPhone 5 did not acquire that “revolutionary” reputation, and now it’s failing to provide a proper map service to users.

Does this, along with the few novelty about the iPhone 5, mean Apple is not going to succeed as well as before with this version of their iPhone? I don’t think that is necessarily true. Apple’s best bet is to rely on the coherent, homogeneous product set it offers: iPad, iPhone, MacBooks, all linked together with iCloud. This marketing strategy allows Apple to sell its complementary products to the same consumers, which in turn increases brand loyalty… and participates to Apple’s success.

Note: This article was made as I had just enrolled in COMM101 after dropping another course. I was not aware of blog post guidelines at that time, which explains the length of this article.

For my first blog post on business ethics, I decided to bring up a somewhat special case I learned about in my sociology classes in Sciences Po, Paris, more than a year ago. I call it special because it is not news, nor is it the description of a specific company or industry’s business practices. Rather, it is an economic sociology research article written by Neil Fligstein and Taekjin Shin that deals with the well-known doctrine of “shareholder value”.

This article, titled Shareholder Value and the Transformation of the U.S. Economy, 1984–2001 and available right here, deals with the influence of shareholder value on the US economy in the 1970s, when American economic growth was fairly low. It was brought up by economists and business leaders as a solution to regain high profits and growth. Its philosophy was simple: managers must focus on profit maximization for the shareholders as their one and only objective. How? Vertical mergers, financial strategies… and layoffs as well as weakening of labour unions.

Indeed, the two authors show, thanks to a huge analysis of 62 different industries and to earlier work references, that layoffs were frequent in that period because companies wanted to focus on their “core competencies” to maximize marginal profit. They also note that labour unions clearly weakened in the 1984-2001 period, through de-unionization, and sum up all their results in a big table I will not directly show here for fear of Copyright infringements. You can find it at the website I linked above.

This raises a very simple, yet essential ethical point: should a business let go of hundreds (or thousands) of employees for the sake of profit maximization? As the two authors sum it up, “workers were certainly being treated less like stakeholders and more like factors of production.” When they were not profitable enough, firms simply got rid of them along with associated infrastructures (such as outdated factories, or agencies in less lucrative markets).

When a firm is doing very poorly or losing money, layoffs are obviously understandable. But what about a healthy, or even leading firm closing less productive sites? Many times, firms only intend to increase marginal profit, not to cover up losses (a well-known case in France lately is the relocation of companies from Europe into countries where labour costs are cheaper). This means the firm is actually making a good amount of money… but it could make more, and provide shareholders with higher profit. That is precisely what happened in the 1980s in the United States: many industries were not as profitable as they used to be, and layoffs happened as an attempt to increase marginal profits. Most firms could have avoided layoffs entirely, but this might have resulted in suboptimal income.

So should a company not increase its margins for the sake of a less profitable factory and the people who work there? Should a company treat workers more as stakeholders they respect or as factors of production they can easily dispose of? That is the main ethical issue this research paper raises.

Based on the specific study I am focusing on in this post, a pragmatic point can be made: at the industry level, layoffs actually seem to have led to fairly lower profits (as expressed by returns on assets)! This means the entire managerial strategy which relied on vertical mergers, layoffs, and de-unionization (amongst others) apparently did not work out in the industries the authors studied. While this result is not sufficient to clearly argue in favor of a more “stakeholder-oriented” approach, based not only on profit but also on consumer, supplier and general welfare, it remains very interesting to point out, because things apparently did not work as expected.

On a more general note, whether or not business ethics make any sense is arguable both ways. It is commonly said that a company should be “rational” and focus on maximizing profit; shareholders, not stakeholders, should be any manager’s concern. For instance Milton Friedman, a great defendant of this thesis, wrote that “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.” (source).

The “rules of the game” are very narrow according to Friedman, and do include openness, freedom, and the absence of deception or fraud. But it does not include caring about employees, suppliers, environmental issues, consumers, institutions or any other “stakeholder”. Yet, why can we not broaden the “rules of the game”? Social norms exist and pressure people into acting in certain ways and into respecting certain ethics very well. Why should it not be the case for business? However, just as individuals do not necessarily respect ethics and in many occasions listen to their self-interest, there is no reason businesses should systematically follow commonly shared ethics. That is why the strongest of norms are ones brought upon and systematized by political authorities, at the local or federal level. Only then, I believe, can we argue that businesses have ethics they must systematically respect. For now, there is only “ethics” and “social responsibilities”, but while they appear to exist, they are neither clear nor do they have to be respected to “stay in the game”.