O-Ring Theory of Development and its importance on a company organization, HR, output & wages

Came across this economic theory by chance (on the Marginal Revolution Blog - Tyler Cowen and Alex Tabarrok) and it was surprisingly insightful, simple and helped to structure my line of thought on the areas of: Management, Organization setup and the importance of Areas of Excellence within an organization. 

Additionally, it also explains the pay gap between excellent (A-players) and very good & below associates (B/C/D - Players).

I strongly advise you to see the video of 19 minutes that provides a great overview of this theory (so you can also understand the math).

So the O-Ring Theory of Development (Michael Kremer, 1993) is underpinned by the following assumptions:

1. Production (broad sense) depends on completing a number of tasks;
2. Failure or quality curtailment of any task reduces the entire product (weakest link problem);
3. Quantity cannot substitute quality (2 mediocre Finance Directors will not do a better job than a great Finance Director)

If you take a broad approach to this production function you have a company or even an entire economy.

Main practical deliverables of such theory:

• Quality matching - you should put your high quality workers together (preferentially allocated to the company areas of excellence, based on its value chain) and the other workers (B/C) also together, instead of mixing them up, as the results will be significantly better;
• Higher quality it will imply better results (i.e. better outputs)
• Higher outputs/results will result in better wages (macroeconomics 101) for any organization & that the function Output/Wages is not linear

• The wage distribution is severely skewed to the right and the talent distribution follows a normal distribution (that is why small incremental talent on the top decile can have a significant impact on the associates wages);

• Workers performing in high-skill firms will have higher wages than low-skill firms (look at the wage gap of tech/pharma companies compared with other industries);
• Talent attracts Talent - High quality worker will want to work with other of the same standards (virtuous cycle)
• There is an tremendous incentive to invest in skills/quality of the workers (company and and associates)
• This theory has several "equilibria", meaning that if your are surrounded by high quality workers it pays-off to invest in becoming one, but if you are within a non-high quality organization it does not pay-off to invest, as your higher potential output will be severely curtailed by the others;
• Capital will be allocated to high quality organizations or within the organization to the areas with the highest quality potential - so if you are investing within your organization make sure you have your A-team on that area.

You can think your organization is performing several activities throughout your value chain, thus applying this theory you can identify bottlenecks, linkages and complementarities and don't forget where are your areas of excellence based on the Value Proposition so you can have your A-players on it!

IMF - Europe 18/10/2019

IMF - Europe 18/10/2019 takeaways:

• Slowdown across advanced Europe from 1,4% to 1.3% specially in Germany, Italy and UK, due to trade tensions and Brexit. 2020 modest recovery of the grwoth rate to 1,5%;
• Demand is strong and it's underpinned by a strong labor market;
• Fiscal policy should be used for the countries with potential expansionary policy slack (Germany / Netherlands) however there are countries that still should be focusing on fiscal consolidation (southern countries);
• Monetary policy should be accommodative as is being implemented by ECB to avoid a recession, however such policy is depletive of potential future monetary policies;
• Emerging Europe is also reducing its growth prospects, still expected to grow at 3,7% and on 2020 at 3,1%;
• Long-term problems remain - productivity and demographics in advanced Europe should be addressed and  Emerging Europe should improve macro-economic policies to tackle structural problems and promote institutions reforms & its governance k«

World Economic Outlook, October 2019 - IMF - Synchronized Slowdown

IMF published on October, 15th 2019 the World Economic Outlook, that reinforces the projections of a synchronized slowdown for the world economy.

My key takeaways:

• 2019 growth rate at 3% for 2019 (below PIIE forecast) and 3,4% for 2020 vs. 3,8% in 2018 due to trade barriers, low productive growth and aging demographics in advanced economies; 
• Advanced economies should slowdown to 1,7% and converging to their potential;
• Downside risk to this projection has significantly increased (trade barriers, geopolitical tensions and Brexit)
• 2020 is expected to go at a slighter better pace driven by emerging markets and base effect, i.e. that global trade activity and manufacturing is so slow in 2019 that 2020 is just picking-up to normal values resulting in a increase of the global growth;
• No recession is foreseen for the next 12 months;
• Trade tensions between US/China (self-inflicted) produced a toll of 0.8% on the world economy,
• Monetary easing in the main economies (USA/EU) is providing a tail wind to the world economy by 0,5%, although it creates additional risks as this preemptive accommodative monetary policy reduce space to fight a potential future recession
• If world economic growth drops to 2,5% it would imply that several advanced economies would be in a recession, thus there is no space to policy missteps;
• Monetary policy cannot not be the only answer to offset this downward trend and fiscal policy should be brought into the game in countries with budget space to accommodate such expansionary policies

World Economic Outlook, October 2019 - IMF

Ideas on solving the Pricing Puzzle - Based on a BCG article

Excellent BCG article on Pricing based on a Wealth management example, although in my opinion applicable to any industry.

What are my main conclusions:

1. Pricing (in all its dimensions) is a key component of a company strategy, not just a tactic lever one should/could use;
2. The top quartile pricing performers have significant better overall results
3. Smart pricing has 4 main components:
• Proper client segmentation (avoid broad-based segmentation on external characteristics easy to define, but on customer behavior and required service levels) ;
• Have a clear value proposition for each segment;
• Optimize the price structure for each segment
• Constantly reassess the above, making it a process and not a 1 time yearly event
• have a clear pricing strategy;
• favor quality over quantity - start small, test, pivot (if needed) and only then deploy. Each company, division, product has its own story;
• Obtain sponsorship within the organization and buy-in (quick wins are important)
• Pricing is a core strategic competence not just a tactic one within marketing
• Embrace Data Analytics - target pricing algorithms, pricing intelligence, etc
4. The Exhibit 6. is self-explanatory and is a great infographic over the key roles and responsibilities of any Pricing team.

Solving the Pricing Puzzle (aWealth management example)

O Crescimento Económico Português: Uma Visão sobre Questões Estruturais, Bloqueios e Reformas

Um livro que lerei no mais curto espaço de tempo para poder obter um retrato estrutural da economia portuguesa (perspetiva da oferta).

Logo que o tenha feito apresentarei um pequeno resumo com as principais ideias/conclusões que retive da sua leitura.

Para quem tenha interesse poderá obter o ebook no link infra.

Mais uma excelente iniciativa do Banco de Portugal

O Crescimento Económico Português: Uma Visão sobre Questões Estruturais, Bloqueios e Reformas

Relantización (significantiva) de la economia Española - Update 10/2019 CÍRCULO DE EMPRESARIOS

El Circulo de Empresarios ha presentado hoy su actualización de Octubre sobre la economía Española, demostrando una fuerte desaceleración (la tercera mayor de los países de OCDE).

Basado en esa información ha revisto en baja sus previsiones para el crecimiento de 2019 y 2020 significativamente, fruto de una desaceleración de la demanda interna,

Para obtener más información os aconsejo la consulta del update integral de su publicación (link abajo)

ASÍ ESTÁ… LA ECONOMÍA OCTUBRE 2019 - CÍRCULO DE EMPRESARIOS

Do managers add value?

The usefulness of managers

Interesting article from the Economist over the value that managers can bring into organizations, based on a study performed by Stephan Billinger and Stephen Rosenbaum*.

Based on the study:

• Managers bring value into an organization, as they promoted the collaboration within a group / achieved better results than a randomized control groups without managers;
• Manager incentives matter both for managers and for workers:
• Workers become suspicious of managers when incentives are included;
• Managers react positively to incentives, however incentives might exacerbate the agency problem and promote short-term behaviors (with the company and with its associates).

My conclusions:

• Managers within a proper framework add value to any organization;
• The incentives/rewards drive culture and behaviors, thus quintessential to a company success.

*Discretionary mechanisms and co-operation in hierarchies: An experimental study, Journal of Economic Psychology 74

Study on the reading list

Review: O Sonho do Celta

O Sonho do Celta by Mario Vargas Llosa
My rating: 4 of 5 stars

O Sonho do Celta apresenta e relata a história de Roger Casement de uma forma vívida, simples e acutilante.

Desconhecia totalmente quem era e a importância que teve na defesa dos direitos humanos no final do século XIX princípios do século XX e o impacto que teve na denuncia dos abusos realizados pelas potências colonizadoras (quer através da ocupação directa e gestão de territórios, quer através do exercício do poder económico)

O livro deu-me a conhecer quem foi e os feitos mais relevantes que realizou durante a sua vida e como lutou pelos seus ideais no Congo, na Amazónia e na Irlanda. Ressalto que este percurso não se deveu a ideias preconcebidas e definidas por uma filosofia estabelecida “ex-ante”, mas como consequência do sentir e viver as injustiças “in loco”, que tendo por base os seu valores morais e éticos o fizerem questionar a realidade em que vivia.

Adicionalmente, o livro também deu-me a conhecer parte da história da independência da Irlanda, que também desconhecia quase na sua totalidade.

O livro é um romance, com tudo o que isso implica, e não é um livro que pretende ser um relato histórico dos acontecimentos, está muito bem escrito e é um romance de leitura fácil e apelativa.


View all my reviews

Storytelling With Data

An interesting HBR video on how to put in practice storytelling with good examples, you just have to go through the first 30 seconds of the video and then it is worthwhile.
3 stages:

1. Setup
2. Conflict
3. Resolution (it does not mean to get it solved, but what was the outcome of the problem/conflict)

Afterwards, you can present your hypothesis and propose a solution

Storytelling With Data: A Good Charts Workbook Tool

Goodyear WinterCommand™ Product Launch Video

On the same subject & related Goodyear Winter tires:
Kim Adams, tyre tester for Auto Express, commented on the tyre’s impressive performance in snowy conditions: “The (UltraGrip) Performance+ dominated our snow tests with an almost two percent advantage over the next best… with a strong front grip and a rear that follows rather than slides through turns. Traction on lock was also impressive in an area where many rivals struggle.”

Automation Isn’t About to Make Truckers Obsolete

Automation Isn’t About to Make Truckers Obsolete

Interesting article on AI and the impact on the auto-industry and specially the trucking activity.

As always in order to fully understand a problem you should analyze in its different workable variables and then make an assessment, is not doomsday (although it will impact several person)but most probably will be a pivotal one specifically for the current truck drivers

How to make your arguments stronger

"...stick to their strongest points; resist the temptation to try besting others with brute force. ..."

"...it’s important to note that the delivery of your message is every bit as important as its content ..."

"...You cannot increase the quality of an argument by simply increasing the quantity of your argument ..."

On Pricing - how to create value

Why do they sell used books by weight (and what that implies for pricing data)

Interesting and make you think about several industries

Direct Listing vs. IPO

Bill Gurley – Direct Listing vs. IPO - [Invest Like the Best, EP.144]



Great podcast on going public: direct listing vs IPO. Also read the latest blog post money stuff I have shared last week on the same subject (why there is this implicit pop). Let you make your own analysis & opinion

Again on IPO Lessons for Public Market Investors.

Pricing vs. Valuation

Global Economic Prospects: Fall 2019 - PIIE

Global Economic Prospects: Fall 2019

Global slowdown & risk of recession increasing, although not foreseeable for 2020
 Key takeaways:
 - US hit by the fade out of the fiscal stimulus sugar high & trade war impacting overall economy;
 - US evolving to potential (1,8% growth rate)
 - Fed should cut at least 1 more interest rate (probability of BS expansion to resume) - this supported by overall economy (see presentation on US monetary policy)
 - Europe sluggish growth 1% as global trade is stalling specially impacting Germany and Italy based on internal unbalances;
 - Brexit impact already kicking-in with negative consequences (Hard Brexit would make the picture even worse)
 - Potential growth for Europe 1.5% (above forecasts)
 - China 6% growth new normal
 - Japan better than previously expected 0,8%
- Brazil speeding up, but still very contained growth

the 3 presentations bring more color and the conference more insights!

THE RUGBY WORLD CUP

https://www.rugbyworldcup.com

What a great World Cup, one of the best of all times and the game has become so more exciting in the last 20 years! On top the values and ethic presented by more than 95% of the players clearly shows that the culture and environment you are in shape your behavior (specially when we compare with football players- a game that I love, but sometime the player attitudes lacklusters it)

James E. Schrager on GE and “the end of history”

What to read next? Take a look at this curated list

Business Book of the Year Award 2019 — the longlist

Projeções para a Economia Portuguesa 2019