Co-evolution of Firms

Was thinking of "Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions" by Johann Peter Murmann again.

I was thinking of what makes the approach of the writer different. That environment affects business is increasingly understood. In strategic planning, SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis uses frameworks like PESTEL (Political, Economic, Social, Technological, Environmental and Legal) factors to evaluate impact of external environment on a firm. Then what is new in co-evolution? Co-evolution attempts to show that as external forces affect a firm, the vice-versa is true as well. Moreover, all the players in the game affect each other. I like it as I feel that it is something very close to what I believe about the world in general (Masterplan and Gaming the World). I think a good understanding of probability and vectors (Mathematics) along with relativity (Physics) would help to model the proposed economic theory. Due to the inherent complexity, it will also acquire an intellectual and philosophical dimension. The theory will also help to dispense away with the idea of a corporation as a helpless victim or lucky benefactor of its environment. Lobby groups are a hard-truth, and the level of their success can have a positive or negative impact on the industry's growth or decline. This does not do away with firm specific advantages (management, marketing, R&D), but adds additional influencing factors and uses the paradigm of co-evolution to explain how an entrepreneurial culture and a pro-active corporate organisation (that is all companies in the industry finding a platform to work collectively and affect the external environment) play an important role. A good example is that the failure rate of dye firms was similar in UK, US and Germany: around 75% of the dyes failed. However, in Germany the number of dye firms that tried starting a business was significantly higher than either UK or US. It, hence, had more successful and unsuccessful dye firms than them. This higher level of trials, experimentation and growth was facilitated by the education system and the legal framework. In turn, a stronger dye industry fostered and lobbied successfully for better educational institutions and favourable legal framework, hence creating a virtuous circle. The opposite was true for US and UK: other industries were more powerful in these countries and dye firms were simply sidelined.

Concluding, I love business history books as they present rich, factual data about real-events. Very much a case study. This book does not disappoint on this front. Additionally, it collates the events in a pretty practical and useful fashion. I agree that co-evolution in business context needs more research and that it has the potential to become a powerful theory. On the other hand, it also points to the fact that common sense, love for work and long-term perspective on events is very important. It also reaffirms that basic principles espoused in "Good to Great" and "In Search for Excellence" are pretty much accurate. A nice book overall.

Knowledge and Competitive Advantage: The Fibre of Success

While explaining the development of the industry, the writer attributes the success of German dye firms to their access to quality knowledge centres in organic chemistry and their strong marketing structure. With very little patent protection in the hey-days of German dye industry, the German firms had to face very fierce competition and always strive to find cheaper ways to produce the goods. Like any commodity or consumer product based industry, they had to develop a strong marketing organisation to differentiate themselves from the competition. It is said that what does not kill you makes you stronger. Nothing could be more true about the firms like Bayer and Hoechst that survived this cut-throat environment. The marketing efforts involved activities like localizing packaging graphics, making efforts to educate customers in order to foster customer retention and kickbacks. Even though the writer praises the marketing efforts of Germans, it is noteworthy that such generalist statement are simply not true. As we have read about Deutsche Bank, many famous German institutions made horrendous mistakes with their marketing tactics while most British alcoholic beverages companies did an excellent job of the same. Building on what the writer states and my understanding, I would say that it really depends on a particular organisation, the state of the industry it operates in (both nationally and internationally) and the knowledge centres available to it (depending on the national institutions and culture). National cultures and institutions can combine to give the industry specific advantages and disadvantages, but to predict how they will do so is anybody's guess and it is only with the benefit of hindsight that one is able to attempt to put a structure around it.

As national institutions affected the growth of dye industry, the vice-versa was also true. Dye industry leaders in Germany rallied effectively for the most part to promote education in organic chemistry, creating a virtuous circle. The business-academia-government partnership promoted education. The business leaders also played an important role in the growth of the company. For example, strong entrepreneurial leadership and willingness to bring in professional managers helped Bayer to become a powerhouse. The development also explains the dynamics of first-mover advantage, the mechanics of exploration in a new industry and the institutionalisation of R&D for technology based industries. The writer asserts (and I agree) that chance does indeed favour the prepared mind. The first-mover advantage is a fact, but political changes, wars and complacency are facts as well. The only truth is that one has to keep eyes and ears open without fail, look towards the future with an entrepreneurial spirit, respect and remember history without carrying its burdens and yet remembering its lessons, ethically promote institutions and lobbies that are good for the business and to be able to nurture and reward talent. To cut it short, it was never easy and never will be. But it was always fun and will always be!

Knowledge and Competitive Advantage: Development of Knowledge Centres

This book specifically focuses on three countries: UK, US and Germany. In order to make the user understand the context of observations, the writer explains the attitude towards education in these three countries and its corresponding effect on the dyes industry. But what were these attitudes?

In UK, where the first industrial revolution was led by inventors and tinkerers with no special education background, education on the whole was ignored in favour of practical experience. Except the centres of excellence at Oxford and Cambridge, not much attention was paid to education. This was especially true for synthetic organic chemistry, a crucial component for the development of the dyes industry. Even though London was plush with imperial capital, it found itself lagging behind Germany and US in this sector.

The US spent heavily on education, but with a very pragmatic outlook. Generally, only if research could prove directly and immediately beneficial was it encouraged. Engineering, management and other practical disciplines got a major boost and in turn contributed to the growth of US as an industrial superpower. US, however, largely ignored research for research's sake and consequently lagged behind in organic chemistry. Nevertheless, it researched production of base chemicals and its firms producing base chemicals were fairly competitive in the global arena.

Germany made research and knowledge the backbone of its industrial setup. Its strong knowledge economy and commitment to research helped it to produce figures like Hoffmann and Kekule in the field of organic chemistry. This, along with the fortuitous timing of the German patent law, helped Germans to dominate the global pharmaceuticals and synthetic dyes industries. Overall, students who wanted to study organic chemistry needed to know German and many travelled to Germany to obtain PhD in organic chemistry.

Knowledge and Competitive Advantage: Of Evolution and Dyes

I have started reading "Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions" by Johann Peter Murmann. My first impressions are of intelligence and almost a child-like enthusiasm in the writer. He tries to "woo" all audience, trying his best to be agreeable (the way he tries to explicitly and elaborately tries to disassociate himself with biological aspects of coevolution is a case in point). Another aspect of worry is that the writer evaluates the growth of industry only till 1914, the eve of WWI. This would give a distorted picture of evolution as it squarely ignores an important aspect: political risk. Sometimes the national institutions that are responsible for a country's rise also contribute to its downfall. This important dynamics of power is squarely ignored. There is a difference between achieving progress and in sustaining the progress, I feel. Nevertheless, the book may prove valuable in understanding the basics of coevolution theory and enable the reader to develop a different way of viewing industrial progress. The book also promises to shed some light on the development of patent laws and their application in UK, US and Germany. The writer also intends to study the subject post WW1 in some future book.

The first thing that I gathered is the concept of "initiator" and "replicator" used to define a coevoluting system. Initiator is the actor that actually interacts with the environment (the manager, employees etc.) and the replicator is a unit that is being replicated in the environment, is responsible for affecting the actors and plays a crucial role in survival (genes, company culture). I also came to know why purple is considered a royal color: before synthetic dyes the color was from a natural dye called Tyrian Purple. This was very expensive and hence only the rich and the royalty could afford it. Hence the association of purple with royalty. The writer goes on to explain the major technical innovations and changes that led to the growth of the synthetic dye industry, and the way this led to the gradual extinction of the natural dye industry. It also explains how and why R&D laboratories came to dominate the industry and lone inventors were not as effective on their own: it is one thing to invent something and another thing to be able to get commercial value out of it. It required not only the traditional investment in marketing and distribution but also persistent effort to make the production process cheaper, reliable and mechanized. This translated into huge costs that could not be afforded by a single individual. This reinforces the observation that capital-intensive industries with small product life-cycles are best served by big companies run by professional managers.

Re-discovering a Ghost

Just finished reading "A Ghost's Memoir: The Making of Alfred P. Sloan's 'My Years with General Motors' " by John McDonald. It is a small book of 187 pages, and I found it so interesting that I finished it in barely 2 days. That is what can happen to reading speed when a book is good. Perhaps in terms of pure business education this book may not have as much to offer in absolute terms, but in terms of realism, strategy, organizational behaviour and group dynamics, the book offers some remarkably deep insights. It is an ode to a person without whose effort the world would not have seen one of the best books in business studies. The book does not reflect well on Peter Drucker, whose introduction to the revised edition of Sloan's book appears both delusional and ridiculous in light of the facts presented in McDonald's book.

I cannot help but observe one thing: a strategist needs to remain unobserved and even under-estimated while being very alert and perceptive, making the right moves at the right time to be silently influential. This, however, can translate into a genius dying unheard and unsung in his time. Only in the long-term and only if somebody is willing to dig enough does the genius appear. A strategist needs somebody who can handle his PR and marketing without jeopardizing the strategist's position of power or influence. A tricky bit but is perhaps necessary. Like Mr. McDonald became a channel to show the world the genius that was Mr. Sloan, sadly nobody was able to play that role for Mr. McDonald. In fact, had it not been for Mr. Drucker's inaccurate foreword, his story would never have been told. We also learn of the importance of the discipline of business historians and their corresponding role as Ghost Writers in bringing out an accurate description of the history of successful enterprises.

The book brings out the importance of chance, networking, strategy and perseverance in any kind of conflict. Luck plays its part, but fortune does favour the brave and the persistent most of the times. It is important to start over with a basis to fight on, without which the fight may prove to be unsustainable. As McDonald discovered that he could bring up a case against GM for suppression of the book and found lawyer friends willing to fight it out, he persisted with it and played his cards right. He never took what was told on its face-value and tried to place it in larger scheme of things. Overall, it is a good example of group dynamics in hostile situations and I would recommend the book to anybody who has read and enjoyed the original book by Mr. Sloan.

Global Brands: Conclusion

Due to growing concerns about alcoholism, effect of alcohol on health and other social concerns, alcoholic beverages companies were further under constant pressure to diversify. Internationalization was a key component of this strategy and so was diversification and acquiring complementary brands. This applied to beers, spirits and wines. The companies, generally, found it easier to diversify into sectors where they could draw upon some common manufacturing, marketing or distribution knowledge. Only the companies who were able to develop a coherent strategy, worked on building marketing knowledge, expanded internationally and diversified appropriately were able to survive. Others were either liquidated or acquired by other companies in the long term. The spirit producers were the first to diversify due to possibility of controlling the production process and relative ease of transportation, followed by beer brewers (discovery of the process of pasteurization of beer helped). Wine producers were the last to diversify due to inherent difficulty in maintaining a consistent quality of the wine from year-to-year.

The book mentions four waves of consolidations since 1960, with British companies leading the pack. In first two phases consolidation took place at a national scale in form of mergers and acquisitions. Phase three saw the birth of global alcoholic beverages firms as we know them today. Firms no only merged across borders with each other, there was also a lot of vertical integration and diversification. Some M&A activities came under the scanner of anti-trust enquiries and blockades for the first time. The last phase has seen rationalization and assimilation of resources and the emergence of trading of brands like a piece of intellectual property. Given the high cost of developing a brand from the scratch, brands in this industry tend to outlive the founders and even the company. Very few new brands are able to make a global mark, and need a sustained & well-thought branding strategy.

Another thing that I have learned is the basic ways in which a company can attempt to break into an international market: e-commerce, merchant houses, agents, distributors, an employee working in the new country, wholly owned distribution channels, partnerships, M&A and starting a new business on their own. The choice depends on the industry in question, desired control on marketing and distribution, the ease with which the company may want to come out of the market, risk appetite and the desired level of expenditure. Overall, the book helped me to take a fresh perspective on consumer goods industry and the strengths (and weaknesses) of a family owned enterprise compared to a firm run by professional managers. I also came to appreciate the role of branding and the marketing knowledge gained over time in the life of a company. Another interesting Business History book over, time to move on to the next one!

Global Brands: Importance of Branding for Consumer Goods

That reach is king is well-known and affects technical and non-technical businesses alike, albeit in different but very crucial ways. For a purely technology business, being accessible and customer friendly may take precedence over perceived quality or benefits, i.e. a client is more likely to invest in systems and technologies that promise to be reliable and are easily maintainable, even if they are not as efficient as other "transient" alternatives. Efficiency and quality is good to have, but mean little in the absence of a strong support structure of distribution and maintenance. Brand management, then, becomes a function of this image: branding is both functional and perceived in almost equal measure.

For consumer goods, on the other hand, brand management is a different ball-game. Due to lack of concrete differentiating factors in general and lesser protection in terms of patents, perceived benefits may take precedence over functional ones. In fact, as the author asserts, food and drinks sector is the most "brand managed" and can have very tight margins. This is highly applicable to the Alcoholic Beverages industry as product life-cycles are larger and differentiating factors fewer. Players in this industry try to ensure survival by clubbing both Marketing knowledge and distribution networks. It is common to find consolidation and cooperation even with rival firms to build a economical and reliable distribution channel. This has been brought out very nicely in this book.

Global Brands: Introduction

Currently I am reading "Global Brands: The Evolution of Multinationals in Alcoholic Beverages" by Teresa da Silva Lopes. As the name suggests, this book focuses on the development of MNCs in Alcoholic Beverages from 1960 to about 2003. Here, it focuses on an industry that has been traditionally dominated by family-owned businesses and relies heavily on marketing: managing brands and distribution channels more specifically.

Why does purely professional management that seems to outshine family-dominated businesses in other industries lag behind here? The author believes that this happens because there is a strong element of heritage and pride in this business, which makes it more than just a "money-spinner" for the family. This ensures that the family tries to take decisions keeping in mind the long-term consequences. For this, they are prepared to bring in professional managers but maintain a controlling stake in the company. Managers, on the other hand, may focus on short-term results to demonstrate performance. While this may work very well for industries with a small product lifecycle (like technology), it is not as effective for the Alcoholic Beverage industry where brands sometimes outlive the company. The business is also marketing-intensive and needs sustained brand management, perhaps more than any other product from the food and drinks industry. The book explores the critical role of effective and consistent distribution channels along with the optimum use and nurturing of the Marketing knowledge. I am impressed with the effort put in to produce this exhaustive research. Overall, as a data repository it is an excellent source to get a bird's eye view of the alcoholic beverages industry and in the process learn some important bits about consumer goods based businesses.

Global Electrification: Conclusion

As electricity started playing a critical role in industrial, military and civilian life, it came to be viewed as an indispensable strategic resource. This, combined with rise of nationalism and intensive capital requirements of the industry, led to the "domestication" of electric utilities and hampered the development of international electric grids. American and Foreign Power, which had come to dominate the electric utility scenario post WW1, lost sizable assets in Latin America and Cuba. Post WW2 big names like Sofina became investment houses. This decline continued well till end of 70s, when barely 1% of the world's electric generation was in private hands. The big Belgian, American and Canadian names lost their considerable clout. Post 70s, the world has witnessed a trend back towards globalization and private ownership. The trend has accelerated considerably after the collapse of erstwhile USSR and the end of cold war. The multi-national organizations entered the arena again, with separation between generation and distribution becoming sharper, and their presence over multiple countries and complex cross-shareholding patterns have re-emerged. It seems that for now the balance has once again tilted towards globalization, a long time after the first great war. For how long it will stay this way is something to look out for.

This book demonstrates the effective use of holding company structure for entrepreneurial activity in capital intensive sectors. It also brings out the political risks inherent to capital-intensive sectors that grow on to become strategically indispensable. The critical role of international finance in the growth of such sectors is also explained nicely. In my view, in the current age a lot of lessons from the book may be applicable to the telecommunications industry. All in all, an excellent book that will give you a good understanding about the development of global enterprises in the last century despite of political risks, set-backs and uncertainty.

Global Electrification: The Proliferation of Electricity

Electrification initially followed settlements around railroads, energy intensive industries (like nitrogenous fertilizers, electroplating, smelters), mining operation, plantations besides in capitals, large cities and port cities. By 1939, however, it had become a part of the "modern" living and critical for industrial progress. In fact, the writers wonder if the reason behind the downward spiral of a once prosperous Argentina was related to its lack of electrification. The growth of this capital-intensive industry started with the invention of arc light, electric bulb, electric motor and electricity generator. It is notable that Edison, commonly thought of as the inventor of the electric bulb, was not the inventor of the electric bulb: the concept had been demonstrated and used by others before him. What he did invent was the use of high resistance filaments like tungsten (instead of carbon) to enable having electric bulbs connected in parallel instead of in series. This enabled the birth of first electric utility and enabled proliferation of electricity supply as a business. Initially, both AC and DC current were produced. The invention of transformers, transmission lines, DC adapters and AC motors tilted the balance towards AC power.

Electricity generation, I understand, is capital intensive. Nevertheless, it appears to be a deceptively one time investment. The engineering, financial and management experience required to run a widespread electric utility is considerable. I came across, what is referred to as, "a holding company" structure that was used to mobilize the gargantuan resources needed for such ventures. Such holding companies comprised of respectable names in the domain (to inspire trust for investments) and typically domiciled themselves in business centres that had deep capital markets and were tax friendly. The most popular destinations before WW1 were UK, Canada, Switzerland and Belgium. Additionally, there was a significant level of cross-holding amongst various holding companies and ownership was often cloaked to avoid any country-specific bias (for example, Germans established a holding company in Switzerland to invest in France and vice-versa as there was fierce German-French rivalry). This made a complex pyramidal structures with a lot of investment often being controlled by similar set of companies and investors. Further, these activities were carried in two models: entrepreneurial and buy-outs. Rings a bell? These are two major investment directions in the Private Equity world as well. This helped me to understand that many activities considered almost vintage Private Equity are in fact much older.

Global Electrification: Introduction

Now, I have started reading "Global Electrification: Multinational Enterprise and International Finance in the History of Light and Power, 1878 - 2007" by William Hausman, Peter Hertner and Mira Wilkins. In the last century, electricity and railroads were two prime forces that changes the face of earth politically, socially and economically. Hence, I am pretty curious about the journey of global electrification and the role of international finance in its development. And so far I find the book pretty interesting.

A few key patterns emerge and re-enforce themselves across various business history books I have read (including the current one). The key time periods that emerge are pre WW1, WW1, roaring 20s, Great Depression, WW2, post WW2 in cold war and post cold war. The whole world saw a lot of change across this timeline. Let us see what we can pick up about electrification and the evolution of business across this timeline.

The countries that played a predominant role in global electrification include Germany, USA, UK, Canada, France, Belgium and Switzerland. Especially Belgians had the first-mover advantage in the domain and continued to be pretty influential well until 1940s (the point till which I have read the book!). The names of Sofina and the Empian group particularly stands out as an influential Belgian holding companies. Germany, pretty predominant on the electrification scene before WW1, rapidly lost its influence after the first Great War and was thrown into a very turbulent time that just kept getting worse. Nevertheless, German manufacturing did reasonably well and some German firms like AEG and Siemens managed to invest internationally either directly or through association with Swiss/Belgian holding companies. The war also saw US getting cash rich and then investing its big piles of cash to electrify communities around the globe. In fact, by 1930 utilities were numero uno in terms of foreign direct investment from the US. UK was not able to capitalize on the decline of Germany and saw its power declining rapidly post WW1. It electrical industry remained mediocre at best. London, however, had the deepest pockets till WW1 and most entrepreneurs who wished to invest in electrification registered their company in UK or Canada to tap these funds easily. Post-WW1, US rapidly displaced UK as the number one destination for raising funds for electrification. UK itself turned more inwards, with the Government feeling that any external international investment would perhaps come at the cost of any internal domestic investment. There was clamour about replacing dependence on finance with dependence on manufacturing of "real" goods (which, strangely, does not sound too different from what I hear today after the recent economic crisis). This, overall, made UK influence on electrification weaker. Even with soft-loans to promote sales of capital intensive equipment for electricity generation, UK electrical manufacturing industry did not do particularly well. Even their massive investments were either sold off or overshadowed by Americans. The role of Canadian entrepreneurs and holding companies in electrification also stands out. In fact, even though US-UK were main source of cash, Belgium and Canada were the main sources of dynamic entrepreneurs, management talent, engineering resources and holding companies. The book is ambivalent about the role of France as I don't see any particular strengths or weaknesses emerging out of the description of their electrification activities. Nevertheless, they did invest in electrification of their own country and their colonies.

NCIC: Conclusion

Finished reading NCIC. Overall, the book has helped me to appreciate the significant role of political risk in the life of a company. The story of Schering seems like a twisted and horrifying parody based on novels of Ayn Rand. While Rand writes about excellence and mediocrity as clearly defined and antagonistic groups working against each other, the truth is much more complicated. In making her characters so one-dimensional, Rand does manage to crystallize the essence of creativity and mediocrity. NCIC highlights the shades of grey that dictate human behaviour in the real world. This book on Schering, however, demonstrates how these colours can play with each other to produce many variations.

Between the world wars the German business, despite of its several advantages, succumbed to a destructive Nazi rule and, in some cases, even fuelled the ambitions of a destructive, racist regime. Companies like Schering simply tried to find a balance in order to ensure survival, but those like IG Farben actively exploited the adverse circumstances for profit. Schering's excellent marketing, scientific research and quality of manufacturing helped it to build a formidable brand and maintain profitability even in the most adverse of circumstances. Nevertheless, as politics took precedence over economics and as chauvinistic nationalism became fashionable, Schering struggled. Business, in general, either refused or failed to understand the power it wielded. Perhaps, the behaviour is not very different from citizens who do not vote, avoid participating in politics and complain about the quality of politicians. It is definitely not the first time that inertia and narrowly defined self-interest have caused problems for a society, but it is appalling to note that the same pattern has repeated itself for centuries without people learning from it. Indeed, who do not learn from history will be condemned to repeat it.

Concluding, there are a plenty of things to learn, both what to do and what not to do, from the story of Schering. The book will also enhance your understanding of the development of the German business in particular and knowledge-based industries in general. Finally, it will help you to appreciate the reason why the political environment of a country is critical to the success and sustainability of a business and how the culture of a country can be critical in determining an organization's strengths and weaknesses.

NCIC: Between the Wars

Between the two world wars, Schering did reasonably well. This was done by spending substantial amount of revenues on marketing, establishing foreign subsidiaries, investing in research, taking care of its employees, localizing the product, giving cultural training to young managers and forging alliances. Marketing and advertising alone consumed as much as 30% of revenues. The wars, turbulent political and economic circumstances, rise of protectionism after the Great Depression, hostility to German products after WW1 and Schering's own bent towards socialist policies prevented the company from realizing its complete potential. To make the reader understand the circumstances in a better way the writer takes great pains to elaborate the effects of WW1, the problems faced (and created) by the Weimar Republic and the final havoc unleashed by the Third Reich. In modern context, when I read about Germany, I am reminded of how Beirut passed from total prosperity to total chaos. Something similar happened to Germany with WW1. It is a wonder that Germany is what it is today despite all the hardships suffered and problems faced. I can make out as much that the writer has a soft corner for Germany. Nevertheless, the book makes me feel pretty curious about Germans.

Another thing that strikes me is that power dynamics has witnessed an incredible amount of change in the last 150 years. The number of wars and turbulent circumstances has been shocking, and all countries have had their share of troubles. This has not only defined their attitude towards the world but also their own self-perception and way they organize themselves. Unfortunately, sometimes the response to mitigate an adverse situation makes things worse. Particularly, a culture of entitlement or one of seeking more rights and powers but lesser responsibilities and accountability can really eat away the vitals of an economy like termites. The understanding of history, politics and economics can seriously increase the efficiency of a business man, giving him a wider vision of the world in which his business operates.

NCIC: Story Before WW2

Read till just after the WW1. Pharmaceuticals industry was historically closely related with the chemicals industry. Camphor, rubber, oil, coal, wood and turpentine oil were some key raw materials. The growth of pharmaceuticals as an important part of the economy has been phenomenal. The demarcation between a purely "chemicals" based business and pharmaceuticals was a blurry one. IG Farben, Bayer and Merck come up as the big German players in the industry. In context of the book, Du Pont also comes up as a major player; a name that before reading this book I had associated more closely with chemicals and its close relation with GM. Schering, though a smaller player, comes across an important player with many innovations, including economically viable synthetic camphor, attributed to it. Its contribution to photography chemicals and contrasting agents also stands out.

Nevertheless, I find the company a bundle of contradictions. Its innovations contrast sharply with its conservative, inward looking, relationships based approach. The way it resisted international investments and engaged in cartels are not exactly the hallmarks of a confident company. I understand that nationalistic passions were running pretty high at that point of time in the history. Germany's bitter experience with WW1 did not help things either. Nevertheless, the fearful attitude and shortage of good managers did affect the growth negatively. Relating it with the history of Deutsche Bank, I also feel that relying on private contacts and relationships was very much a part of business in those days. So much for merit, intelligence and hard-work. Connections and being in the right family could be the making or breaking point. It is good to note that in today's world the number of opportunities has increased, though not equally in all countries. I am not sure if nepotism and elitism will ever go away, but information technology advances have definitely enabled and empowered people to start a business more easily. Three cheers for IT!

Finally, after reading a lot of sugar-coated management books, it is good (though a bit bitter) to read a book grounded in facts. Hard-nosed realism. The complexity and shades of grey that it brings out are, well, enlightening. The sooth-sayers are not wrong, but it is good to know and realize that not everybody is in business with the same motive. Business history ultimately judges a company by its ability to build perception and the end results. It also brings out the role of politics and luck in the life of an enterprise. It demonstrates that there can be umpteen ways to reach the same place, and it is alright as long as you are willing to make the journey.

National Cultures and International Competition (NCIC): Connecting Dots

Continuing my reading blitzkrieg, I am now reading; " National Cultures and International Competition:The Experience of Schering AG, 1851–1950" by Christopher Kobrak. Down the first 100 pages, the book looks interesting.

The first thing that I gather from this book is a better understanding about German historical attitude towards business. The presence of two boards in German companies, developing a "community of interests" and legalization of cartels to counter effects of economic difficulties and capitalism, the effect of wars on German economy (and psyche) and why coal and iron were so politicized are few key points to learn. In fact, it relates very well with why coal and steel were the primary focus in the 1957 treaty of Rome. For the first time I am able to appreciate the difference in business attitudes in Germany from UK, US and India. History does help you to appreciate the present and to avoid mistakes in the future.

The second thing I realize is that Germany was in a very formidable position before WW1, with only US hoping to do as good. With WW1, US expropriated 506 German companies and 12000 German patents. This, along with the American capacity to organize and think big, the managerial revolution, elimination of its biggest rival, a favourable geographic location and war sales bonanza transformed US forever. Whatever was left was sealed by WW2, when dollar finally replaced pound. The more I read, the more events interconnect and make sense. I guess victor's justice is a truth of life, and I have to also watch out for the personal bias of authors keeping in mind that this is but one side of the story.

All in all, an interesting start. Will keep you posted.

Banking on Global Markets: Conclusion

WW2 and the subsequent division of Germany into two parts saw the beginning of a new era. Dollar replaced Pound as the world's reserve currency, the Cold War began and Bretton Woods system cam into being. West Germany was right at the frontier of the Cold War. Formation of NATO, fear of Communism and the 1957 Treaty of Rome let to stronger cohesion in the Western powers. Overall, the German economy in particular and Western economy in general did pretty well. Despite the protectionist and nationalist passion carried over by the previous era, the period after WW2 saw denationalization of finance. This was a direct result of free-convertibility of currencies and the ease with which money could move from one country to the other. If anything, the advent of information technology made the process faster and more difficult to control.

Under the able leadership of Abs, the Deutsche Bank managed to go through this turbulent period rather effectively. It was able to avoid American pressure to break itself and hold on to its structure of a "one-stop" bank. This brings out a very fundamental difference in American and German attitude towards finance in general and banking in particular. While Americans hated seeing too much power being concentrated in the hands of any one institution, Germans encouraged such institutions as symbols of stability and national pride. The specialized US Investment Banks, though, gave Deutsche Bank some serious competition and were more effective due to their focused agenda. Duetsche bank found it a little hard to adapt from a banking based on relations to a banking based on commoditized services and transaction carried over impersonal capital markets. As far as from 1870, boom and bust cycles have been a hallmark of capitalistic systems. Cartelization and groups of interest were especially strong in the German business to counter the effects of such cycles and deal with the effects of destructive competition. It seems the influence of this thinking lasted well after WW2. A strong nationalistic influence also made it a little difficult for Deutsche bank to adapt rapidly to other cultures. Lack of enough good management talent and shoddy acquisitions continued to haunt the bank as far as 1990. The two world wars, the division of Germany and subsequent reunification had a cumulative effect of not only hurting the bank's bottom line but also making it a bit cautious about international investments. Nevertheless, by 2000 with its acquisition of the Banker's Trust the bank had displayed some significant improvements, becoming a world leader in the business of global currencies, commodities trading and credit derivatives trading. Additionally, it is very clear that the American operations had a very strong influence on the bank in terms of revenues, management and getting a stronger footprint in investment banking.

Concluding, the story of Deutsche Bank is indeed the story of evolution of finance. The book gives a good insight into the working of the financial world besides bringing out the importance of political factors and international co-operation for the profitability of a business. The way Deutsche Bank grappled with changing international scenarios, different cultures and lack of management talent is particularly instructive for any company or individual who wishes to operate internationally. Finally, the way the Bank has survived in face of seemingly impossible obstacles is inspiring. A good book overall.

Banking on Global Markets: Story Till WW2

From 1870 to 1914 financial institutions operated on the basis of trust, relationships, family ties and politics. In a fairly globalized world, where the British reigned supreme and ensured European supremacy, exchange rates were fairly stable and cross-border finance relatively less risky and easier to implement. London was the primary banking centre while US and Germany were growing at a prodigious rate, and German technical know-how was already gaining respect and recognition. In this atmosphere, Deutsche Bank led the German effort to invest in the US and other parts of the world. After reading the first part of the book, I feel that in the US operations bad management and over-reliance on only few key people(Siemens, Villard and Adams) were the bank's Achilles heel. Notably, Villard played a roguish role, but managed to thrive due to his charisma and contacts. The bank ended up investing in companies that either took too long to give a reliable (or any) return on the deployed capital. Deutsche Bank found itself frantically trying to manage defaults by American companies and being stuck with investments it did not want. The biggest fiasco were investment in some railroad companies and in an upcoming coking facility. Only the investment in Edison General Electric (later General Electric), though not completely free of problems, turned out to be relatively good. Essentially, the bank found itself playing second fiddle to Morgan and Speyer in the American financial arena. Nevertheless, it seems it managed to turn out a respectable, if not excellent, profit.

WW1 saw finance and economics being made secondary to nationalism. As a direct result of the war protectionism and many socialistic values took deeper roots in many societies across the globe, perhaps with the hope of making a more just society. Nazism, fascism and communism found their roots as a result of economic problems, racism and aggressive nationalism. The period also saw the emergence of US as the world's richest nation, transforming itself from a debtor to a creditor nation, essentially fuelled by its managerial revolution and profits from war. Its strong influence shaped banking regulations with retail banking, investment banking and management consultancy coming out as three distinct fields. Germany, from advising the US to have better financial policies, found itself on getting lectures from Americans about the same; a remarkable reversal of roles in the span of few years. It also found its concept of universal banking directly at odds with its American counter-parts.

Between the two world wars, Deutsche Bank increasingly found itself between a sharp rock and a very hard place. From managing the default of American companies it found itself managing the anger of US investors over default of German companies. Its role in the Nazi government brought it a great deal of notoriety. The wars also saw it loosing many assets to "legalized theft" or Government confiscation. Two wars, strong nationalistic policies by Government around the globe, a hostile dictator at home and effort to help its clients retrieve the assets lost to confiscation took a toll on its profits and performance. It continued with its reliance on relations and a few key people to get things done. Overall, I feel that even though Deutsche Bank's performance was below par in this era due to a host of difficulties and adverse situations, there are quite a few lessons that one can learn by reading this text. It nicely brings out the various pitfalls of an overly centralized management, problems inherent to operating in a different cultural environment, the pros and cons of over-reliance on contacts for business, problems with a leader who can get things done but cannot mentor and the possible effects of unforeseen circumstances, natural disasters and wars on a corporation.

Banking on Global Markets: Inside a Black-Box

I have started reading "Banking on Global Markets: Deutsche Bank and the United States, 1870 to the Present" by Christopher Kobrak. To say the least, the book is really fascinating because I think it may demystify the working of powerful banks to some extent. Till now I was reading more about relatively idealistic management literature and theories, where ability, self-awareness and vision are the defining factors. This book, however, brings out the aristocracy of pull rather beautifully. I don't know how much of it has changed over the years, but from about 1870 to well into 1914 (till the point that I have read) banking was the domain of a few rich and powerful banking dynasties like Rockfellar, Morgan, Speyer et al. Business was done more on trust and personal bonds rather than anything else. Level-4 leaders or abject self-promoters were the only other people who could hope for success in these transactions. The writer mentions that the Banking Dynasties operated somewhat like European Royal Aristocracies. And they had a frighteningly strong hold on businesses and economics, something that I reckon continues till date.

A detailed, thoroughly researched and well-written history of Deutsche Bank wrt US also serves as an interesting read for anybody who hopes to do business in a cross-cultural environment with unpredictable laws. In many respects, by the time 1900s started, US was pretty much at the juncture where China is today (and US is where UK was then!). There are a few uncanny similarities: the banks find a rapidly growing economy too hot to ignore but do not know how to best deal with the unpredictable regulatory environment. I am really positive about this book and I hope it will provide some wonderful insights into the inner workings of the best financial institutions of the world.