Hayek’s Ideas As Marketing Strategy

In McKinsey Quarterly’s latest paper, “Capturing the world’s emerging middle class”, authors David Court and Laxman Narasimhan recommends several strategic steps for companies to capture and profit from the rapidly growing and huge middle class markets in emerging economies.

It occurred to me that the gist of the proposals have been latched upon harnessing local knowledge which appears no less than F. A. Hayek’s ideals.

From McKinsey, (all bold highlights mine)

``Another tack is to work at a more local level, gaining scale in specific regions and categories by teaming up with deeply knowledgeable on-the-ground partners. They can help not only in product development but also in distribution and market positioning—the crucial final steps to reaching highly local consumer markets.”

More...

``Other strategies for penetrating this affordable, accessible, and local market are to use celebrity endorsements and to leverage local knowledge, either selectively, in areas such as distribution, or through more comprehensive alliances...

And...

```Using local vendors is critical to running a lean operation: many multinationals have found, for example, that capital outlays in emerging markets are often only 30 percent of those required for a factory in the West if they use local resources for plant and process engineering and to execute projects.

Here is Friedrich August von Hayek on “The Use of Knowledge in Society” (bold emphasis mine)

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Bottom line: The Hayekian concept of knowledge does not just function as an economic theory, but importantly has micro applications in other fields as marketing. In short, the application of Hayek’s Knowledge problem could translate to an edge in business application.

Marketing Strategy: From Pickpockets To Putpockets

Putting some fun into the crisis, in London, as part of an advertising blitz, former pickpockets does a reverse- they put-pocket or put money into people's pockets in stealth. (hat tip: Mark Perry)

From Reuters, ``Visitors to London always have to be on the look out for pickpockets, but now there's another, more positive phenomenon on the loose -- putpockets.

``Aware that people are suffering in the economic crisis, 20 former pickpockets have turned over a new leaf and are now trawling London's tourist sites slipping money back into unsuspecting pockets.

``Anything from 5 pounds ($8) to 20 pound notes is being surreptitiously deposited in unguarded pockets or open handbags in Trafalgar Square, Covent Garden and other busy spots.

``The initiative, which runs until the end of August in London before being rolled out countrywide, is being funded by a broadbrand provider, which says it wants to brighten up people's lives in unusual ways.

"It feels good to give something back for a change -- and Britons certainly need it in the current economic climate," said Chris Fitch, a former pickpocket who now heads TalkTalk's putpocketing initiative."

Maybe if governments catches on to such an idea, they might incorporate this as part of their stimulus programs.

Selling the Bailout: The Fear Factor

``For historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways. History is particular; economics is general." Charles Kindleberger, Manias, Panics and Crashes A History of Financial Crises (New York: Basic Books, 1989), p. 16.

Proponents of the bailout package have focused on two major concerns to advance their cause: fear and the allure of profits.

In marketing, sales pitches generally have to connect with emotions to create the necessary interests or conditions required to generate the desired outcome: sales. And what emotion could be easily trigger quick response or reaction than fear! According to marketing savant Seth Godin, ``Marketing with fear is a powerful tool. Fear is a universal emotion, it's viral and people will go to great lengths to make it go away.”

So when officials go to the extent of contriving Armageddon scenarios in order to secure the political capital required to pass their sponsored legislation as this…

From Federal Reserve Chairman Bernanke (quoted by New York Times) ``If we don’t do this…we may not have an economy on Monday.”

…we understand this as nothing but a hard sell meant to ram into throats of the Americans the notion that Wall Street and Main Street needs a “savior” by constant government intervention of the marketplace.

Think of it this way, it has been MORE than a year where the Bernanke-Paulson tandem have peddled this mirage in myriad ways to no avail: the $163 billion fiscal stimulus at the start of the year, various assorted alphabet soup of bridge financing facility some of which had been enabled by the rarely used legal authority under Section 13(3) of the Federal Reserve Act (Wall Street Journal), overseas swap lines, 325 basis points Federal interest rate cut, the takeover of Fannie Mae and Freddie Mac and AIG, the forced marriage of JP Morgan and Bear Stearns with the backstop from the Federal Reserve, tapping the $50-billion Exchange Stabilization Fund to offer insurance to money-market fund investors to stop a run on the funds (WSJ) and others…

Yet at the end of the week, global world financial markets remain under severe duress, see figure 1.

Figure 1: Danske Bank: Credit Stress and Liquidity Crunch

So even as the Bernanke-Paulson team (B&P) managed to secure the much needed mandate via Emergency Economic Stabilization Act (originally the Troubled Asset Relief Program-TARF) for the use of $700 billion at their discretion to support domestic markets (including foreign banks with domestic exposure), US equity markets fell sharply over the week: Dow Jones Industrials tumbled 7.34% (year to date down) 22.16%, S&P cratered 9.4% (down 25.14% y-t-d) and Nasdaq crashed 10.18% (down 26.58% year-to-date).

As a side comment, US markets appear to be fast catching up on the loss statistics of the Philippine equity benchmark the Phisix, whose decline has interestingly been mild (relatively speaking amidst this turmoil) and could have signified sympathy selling (down 1.19% this week and down 29.14% year-to-date) than a traditional rout.

The credit crisis seem to worsen with the apparent collapse in the US commercial paper market- (investopedia.com) “An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days” or market facilities which enables corporations to gain access or utilize short term financing (see right pane courtesy of Danske Bank). Aside the skyrocketing cost of funding seems to reinforce the indications of the ongoing stress on interbank lending or as some analysts insinuate a “silent bank run” (right pane).

According to Steen Bocian of Danske Bank, ``First, perceived counterparty risk went up as fears of other bankruptcies swept through the system. Banks therefore became even more reluctant to lend money to other banks. Second, the collapse of Lehman Brothers led to big losses for the oldest US money market fund, Reserve Primary MMF, which “broke the buck”. This means that investors experienced real losses on funds invested in the Reserve Primary MMF, as net asset value went below USD1. This was the first time since 1994 that a money market fund had broken the buck. The incident led to a flight of money out of money market funds in the US.” (underscore mine)

This is the critical link between Wall Street and Main Street. When the cost of funds shoot skyward, many ongoing or expansion projects are likely to grind to a halt and companies or institutions surviving on the margins end up filing for bankruptcy. Even states like California have quietly sought funding ($7billion) from the US Treasury.

Interventionism Doesn’t Seem To Work

So in spite of the so-called interventionist nostrums you have the markets generally rioting or becoming more dysfunctional.

This could mean one of three things:

one- measures have not been enough ($700 billion is not enough) or

two-measures don’t address the root problem but instead deal with the symptoms or

three-market could be reacting to the law of unintended consequences.

Economist and author of More Sex is Safer Sex Steven Landsburg in the Atlantic.com wrote a very eloquent poignant piece about the current banking crisis (emphasize mine),

``So what's special about banks? According to what I keep reading, it's that without banks, nobody can borrow, and the economy grinds to a halt.

``Well, let's think about that. Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they'll be able to find each other.

``That's one reason I feel squeamish about the official pronouncements we've been getting. They tell us bank failures will make it hard to borrow but never that bank failures will make it hard to lend. But every borrower is paired with a lender, so it's odd to state the problem so asymmetrically. This makes me suspect that the official pronouncers have not entirely thought this thing through.

``In the 1930s, a wave of bank failures did make it hard for borrowers and lenders to find each other, and the consequences were drastic. But times have changed in at least two relevant ways. First, the disaster of the 1930s was caused not just by bank failures, but by a 30% contraction of the money supply, which is something today's Fed can easily prevent. Second, as any user of match.com can tell you, the technology for finding partners has improved since then. When a firm wants to raise capital, why can't it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?

``I know, I know, the rest of the world is in crisis too. But surely in the vast global economy, it should be possible to find someone capable of introducing a lender to a borrower. (Note that I'm not talking about going to foreign lenders, though that's another option. I'm just talking about the same American borrower and American lender who would have found each other through Bear Stearns finding each other through Barclays instead.)

``In other words, I'm not sure these big Wall Street banks are really necessary, and I'm not sure we'd miss them much if they were gone. Maybe there's something I'm missing, but if so, I think it should be incumbent on Messrs. Bernanke, Paulson and above all Bush to explain what it is.”

Or a similar thought from Bill King (hat tip Barry Ritholtz), ``The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.”

``The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.”

Like us, Mr. Landsburg and Bill King acknowledges that the banking system is no less than one huge cartel organized and operated by a network of central banks led by the US Federal Reserve living off under the platform of US dollar standard fractional reserve banking system whose basic premise is one of institutionalized leverage (legally required to keep only a fraction of deposits relative to lending). And whose boom bust policies foster banking oligopolies and crony capitalism.

The Opportunity Cost of A Wal-Mart Bank

Proof? In 1999 Wal-Mart’s attempt to buy a savings bank in Oklahoma was foiled by the Gramm-Leach-Bliley Act. In 2002 Wal-Mart was again interdicted from acquiring the California ILC by the California legislature. In 2005, community and regional banks closed ranks to defeat Wal-Mart’s application banking license on fears that it might grab away their businesses (sfgate.com).

The point is not to defend Wal-Mart attempted entry in the banking industry, but to accentuate the example of the use of laws to prevent entry of new competition.

And this has been the essence of the Wall Street bailout: to sustain the clique on the premise of the sustenance of systemic concentration-“too big or too interconnected to fail” whose functionality has been “too embedded in the economy” which requires today the poor and mid class Americans to pay for the sins of a flawed currency system based on the rule of elite.

A financial and economic model where the poor subsidizes the rich, very much in resemblance to today’s global current account imbalances paradigm (poor emerging countries with current account surpluses subsidizing rich current account deficit countries). Free market failure anyone?

Conditions That Pave Way For Greed

The fact that the essence of today’s bust is one which stemmed from excessive leverage has been principally reflected on the operating principles of fractional reserve banking system. Where one can get away with piling on more leverage to gain additional profits why then stop? “As long as the music keeps playing we keep dancing”.

Is it all about greed? Think of it, when borrowing rates offered you is at ZERO rates or money for “free” what would you do? Take up the money and speculate. You chase for yields. You lever up. You lengthen your time preference based on false signals that the credit offered have been backed by real savings. And since everybody seemed to doing the same, why not seek the “comfort of the crowds”? You chase momentum on assets that have been popularly boosted by inflation or speculation. You flip stocks or houses. That’s exactly what the public did upon the implicit prodding from government policies.

US Banks which has signified as the main pillar of the fractional reserve bank system, has essentially transmitted the same principles to the society by: overextended gearing, overspeculation, adopted computerized quant risk models, went around regulatory loop holes as the net capital rule (New York Times), morphed into a new business model of “originate and distribute” which passed the credit and repayment risks to end-users freeing up more capital to lever, utilized innovative “hedge” instruments (structured finance and derivatives) to accrue incremental gains, relaxed lending standards to produce economies of scale, and moved out of the regulated sphere to establish the Shadow Banking System.

As for government policies, responsible for twisting incentives that led to these boom: Fed policies (aside from monetary policy, remember Greenspan’s advanced the idea of Americans moving to ARMs?), the implicit guarantee of the Government Sponsored Enterprises, Mark to Market Accounting Rules and the Community Reinvestment Act (which forced lending to less qualified candidates based on the concept of expanding homeownership or protecting the American dream).

Moreover, regulatory oversight became lax when the boom flourished! This very insightful quote from Robert Arvanitis Risk Finance Advisers, Institutional Risks Analystics, Seeking Beta: Interview with Robert Arvanitis (highlight mine)``Being mortal, the bureaucrats desire to avoid pain is as dear to them as the desire by their counterparts in private industry to seek gain. And it is far more profitable to game the rules, for example, than to enforce them. And any system can be gamed.” Yes indeed why get blamed for stopping the music while everybody is dancing? (hat tip: Craig McCarty)

In other words, Wall Street under the backstop of US Federal Reserve inflated the system until it became evidently unsustainable and thus collapsed.

So what is the basic problem? Inflation, overspeculation, overvaluation, oversupply and excess leverage or having taken on too much debt more than one can afford to pay. Essentially the ongoing bust represents market forces unraveling the massive distortions imposed on it or the reassertion of the universality of economic laws.

And $700 billion would seem like a spare change relative to the degree of market distortions that need to be cleansed from the system or the current high level of debt needs to be reduced to the level where the US economy can afford to pay them.

Markets have simply been telling Wall Street and the US, particularly Bernanke and Paulson and the US leadership, that it won’t be cowered by threats, and that market forces have been revealing the truth and realities about the untenableness of the imbalances within the system.

Perhaps it is about time to reconsider accepting the non-traditional non-cartelized sources of financing.

Interesting Trivia on Google

Here is an interesting article from my default search engine Google as excerpted from Askmen.com…

“5 Things You Didn't Know: Google

There is no other company more synonymous with the internet than Google. As the mother of all search engines (a legitimate title considering Google surpassed Yahoo! as the most visited website in the U.S. in 2008), Google has come a long way since its early beginnings. It is also ranked as the No. 1 company to work for, according to Fortune magazine. Its popularity has become so widespread that most think Google was born along with the internet. To others, however, Google is the pinnacle of all internet companies -- a multifaceted search engine extraordinaire.

Why such intrigue? Well, here are a just a few things you didn’t know about Google.

1- Google spends $72 million a year on employee meals

Seventy-two million dollars a year -- that works out to about $7,530 per Googler (a term Google uses to identify employees). While the exact details vary depending on location (the Google empire spans the globe), employees at Google's California headquarters, aptly entitled the Googleplex, are welcome to at least two free meals a day from 11 different gourmet cafeterias. As if that weren’t enough, another thing you didn’t know about Google is that in addition to the cafeterias, Google offers numerous snack bars that are chock-full of healthy morsels to munch on.

And that's certainly not all. Is your car in a bit of a rut? Not to worry; Google offers on-site car washes and oil changes. The list of perks for working at Google is never-ending, making it no surprise that it's considered the No. 1 place to work, offering: on-site haircuts, full athletic facilities, massage therapists, language classes, drop-off dry cleaning, day cares, and on-site doctors, just to name a few. Oh, and if your dog is stuck at home and feeling a little lonely, just bring him to work -- Google doesn't mind.

2- Google was originally called BackRub

Like many other booming internet companies, Google has an interesting upbringing, one that is marked by a lowly beginning. Google began as a research project in January 1996 by cofounder Larry Page, a 24-year-old Ph.D. student at Standford University. Page was soon joined by 23-year-old Sergey Brin, another Ph.D. student, forming a duo that seemed destined for failure. According to Google's own corporate information, Brin and Page argued about every single topic they discussed. This incessant arguing, however, may have been what spurred the duo to rethink web-searching and develop a novel strategy that ranked websites according to the number of backlinks (i.e., according to the number of web pages that linked back to a web page being searched), and not based on the number of times a specific search term appeared on a given web page, as was the norm.

Because of this unique strategy, another thing you didn't know about Google is that Page and Brin nicknamed the search engine BackRub. Thankfully, in 1998, Brin and Page dropped the sexually suggestive nickname, and came up with “Google,” a term originating from a common misspelling of the word "googol," which refers to 10<sup>100</sup>.

The word “google” has become so common, it was entered into numerous dictionaries in 2006, referring to the act of using the Google search engine to retrieve information via the internet.

3- Google loses $110 million a year through "I'm Feeling Lucky"

There's not much to see on Google's main search page, and perhaps simplicity is one of the keys to Google's success. When searching Google, you are given two options: “Google Search” or “I'm Feeling Lucky.” By clicking the former, you are given that familiar list of search results; by clicking the latter, however, you are automatically redirected to the first search result, bypassing the search engine’s results page.

Besides the fun factor, the idea behind the “I'm Feeling Lucky” feature is to provide the user with instant connection to the precise page they are searching for, thus saving them time that would normally be spent perusing endless search results. Sounds harmless enough, right? Not so fast. Because “I'm Feeling Lucky” bypasses all advertising, it is estimated that Google loses about $110 million per year in advertising-generated revenue. So why in the world would any Fortune 500 company not patch such a gaping leak? "It's possible to become too dry, too corporate, too much about making money. I think what's delightful about 'I'm Feeling Lucky' is that it reminds you there are real people here," Google Executive Marissa Mayer told Valleywag, an online tech-blog.

4- Google has a sense of humor

Google also offers full language support for Pig Latin, Klingon and even Elmer Fudd. Anyone else still feeling lucky? Try typing, “French military victories” and clicking “I'm Feeling Lucky.” Behold the result.

Some might remember the “miserable failure” fiasco when one typed those words and clicked “I'm Feeling Lucky,” and they were instantly connected to a biography of President George W. Bush on the White House website. Now, before you jump to conclusions, this trick -- which no longer works -- was carried out by members of the online community through the art of “Google bombing.” Google bombing works because of Google's backlink search strategy.”

Read the rest at askmen.com