Michael Porter and UKIP

Again, not an obvious juxtaposition, but it seems to work.

Ask any MBA or Economics student about the leading work on competitiveness and he will tell you that it is "Competitive Strategy" by Michael E. Porter, Professor of Business Administration at the Harvard Business School, the recipient of the 1979 McKinsey Foundation Award for The Best Harvard Business Review Article. Professor Porter developed the much praised MBA course on Industry and Competitive Analysis, lectures widely on competitive strategy, and is a strategic consultant to numerous companies round the world.

For the benefit of those who don't know it, Porter's ideas on competition are widely used to analyse the competitive position of companies, and evaluate their potential as credit risks or investment opportunities (or at least it was until the markets became obsessed by asset prices and volatilities, as though tat had anything to do with the real world).

Porter has applied the same framework to analysing the competitive position of countries, which no doubt has generated extra consulting income from various governments, but it strikes me that the same thinking applies to politics too, and it explains a lot about the current situation in politics.

The Porter Model is based around an analysis of 5 forces:

Supplier Power: The standard Porter business model assesses the power/threat from suppliers. In the political model we substitute this for the power of capital and tax payers - i.e. those who fund the economy and pay its taxes.

Buyer Power: The standard Porter model looks at the relative power of customers and their ability to dictate terms.  In the political model we look at the demands of the population.

Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if you are unique, then you can often have tremendous strength. Same in business as in politics.

These 3 forces drive the competitive position of most political parties most of the time.  When the government needs cash because it is spending too much and taxes are too high, then the political mood willl swing to the right.  When services decline but the people think they can afford more, the parties of the left will be stronger.  Who exactly gets into power will depend on how many parties there are and where they are positioned.

So far so very familiar.

Threat of New Entrants: In business the strength of a company is undermined if other companies can enter a market at will, and strong companies will have barriers to entry, such as intellectual property, high capital costs or unique strategic positioning (e.g. ports, airports, prime real estate). In politics this risk is mitigated by strong party structures, but this doesn't completely obviate the risk of a party or government being displaced by another group with similar values (but maybe a different approach). Witness Berlusconi and the Russian oligarchs who gained political power by SWOM (sheer weight of money), or the many military coups that take place in a year

Threat of Product Substitution: In business this is the risk that your product offering will be made obsolete by innovations, or perhaps just a new way of doing things.  In politics, it may be the risk that a new party will simply look at the world in a different way from the traditional left-right view taken by most politicians. In many cases, the new entrant will be a single issue party that tacks on a lot of subsidiary policies to demonstrate that it is more than a one trick pony, but in essence it has a single cause that is its sole raison d'etre and which it uses as the basis for its views. Witness the Greens, various Nationalist (and ultra-nationalist) parties, and of course, UKIP. Conventional politicians don't necessarily have a response to the points made by these parties, so they try to pigeonhole them as left or right wing.  They also attack them for being outside the usual political discourse (i.e. not one of us).

In fact what they should be doing is to respond to their needs in such a way as to eliminate them before they get too big, but they ain't always that smart, which is why we are where we are with UKIP.

Dual Currency deposits and the minimum wage

Not an obvious combination, but a though provoking juxtaposition.

About a year ago, it may have been more, I wrote about a pernicious product sold by a lot of banks in the Far East called a Dual Currency Deposit, or some variation on the same. The whole idea was to induce a customer to place a deposit with an apparently high rate of interest, with the catch that the deposit could be repaid by the bank in one of a choice of currencies. The choice being the bank's.

Which wouldn't be so bad if the capital redemption was converted at the spot value prevailing at the redemption date.  But oif course it wasn't. The conversion rate was fixed at the outset, and on the face of it, it might have been a reasonable forward rate. In practice the value of the eventual spot rate would be very different from the fixed rate and the bank had the option to put the cheaper currency back to the customer saving far more the customer had been paid as an interest premium.

Now, sometimes the customer could win. If the future spot rate was the same as the fixed rate in the contract, then the customer didn't lose on the redemption and got paid some extra interest.  But the bank always made money, With the implied currency option against the customer, the bank could write an option with the market to close out the position and pick up an option premium which would be worth substantially more than the bank would pay the customer in extra interest.

Basically the customer got screwed because he didn't understand the risk or the value of the currency embedded in the deposit contract. And yet when pushed on the points, they repeatedly said that their customers were indifferent as to whether they were repaid in currency A or currency B. And often the customers could be persuaded to say the same.  Which kind of missed the point.  The customer could have withdrawn his deposit and converted it into the other currency if the urge took him at the end of the contract. The issue was never the currency but the value of money that would be repaid.

So what has that got to due with the National Minimum Wage? On the face of it not very much, until we realise the role of the NMW's first cousin, the Zero Hours Contract.  For years we were told by its advocates that an NMW wouldn't have an effect on employment, whilst its opponents said that it would be devastating for unemployment/ In came the NMW and apparently employment levels didn't change, and even as the minimum wage increased we were told that there was no impact on levels of employment.

But what we did see was an increase in the number of zero hours contrctas. What is a zero hours contract? A zero-hour contract is a contract of employment used in the United Kingdom which contains provisions which create an "on call" arrangement between employer and employee. The employer asserts that they have no obligation to provide work for the employee. The employee agrees to be available for work as and when required, so that no particular number of hours or times of work are specified. The employee is expected to be on call and receives compensation only for hours worked

Sounds great for the employer, because he gets a free option over when to call on workers. All businesses have peak periods so the employer only needs to pay for workers when they are busy.  We really like this way of working because it gives us flexibility.  And the employees like it too because it is flexible for them too. Or at least that is what some of them are wheeled out to say to the cameras.

Where have we heard this all before. Ah yes the dual currency deposit.  The employee thinks that he is getting a "flexible" deal, when in practice the option is being exercised on him, and only when it suits the business. Arguably the higher minimum wage means the worker is being paid a premium (at least over the previous rate) and like the bank in the DCD above, the employer is willing to pay this premium because the employee doesn't understand the value of the option he/she is giving the employer through the ZHC.

Moral: there is nothing wrong with ZHCs that couldn't be fixed by some serious option pricing.