Finance

Economic Relations

Economic Relations Jonathan Poland

Economic relations between nations refer to the economic interactions that occur between them. These interactions can include the exchange of goods and services, the flow of capital and investment, and the sharing of technological knowledge and expertise. Economic relations between nations can provide numerous benefits, such as increased efficiency and productivity, access to a wider range of goods and services, and greater economic stability. Additionally, countries that engage in economic relations with other nations are typically better equipped to withstand economic downturns and other challenges. In contrast, nations that are economically isolated often suffer from stagnation and instability.

Trade

Trade is the flow of goods and services over borders. For example, an American streaming media service that operates in dozens of countries.

Financial Markets

Markets for currencies, securities and other financial instruments that operate over borders. For example, the ability of American investors to buy Canadian stocks and vice versa.

Foreign Direct Investment

Investments by foreign firms in businesses that they control within your borders. For example, a Japanese car manufacturer that builds a factory in Mexico.

Soft Power

Soft power is ability for one nation to influence another without threat of force. For example, a nation that educates the future leaders of many nations in its great universities.

Foreign Aid

Assistance that is provided by one nation to another. This is often done for ethical reasons such as helping to prevent a humanitarian crisis. Foreign aid is often in a nation’s best interests as it may build soft power or help to stabilize a region.

International Institutions

Organizations that are formed by multiple governments to facilitate diplomacy and cooperation in areas such as peace, economic markets, infrastructure, health and security.

Labor Markets

The flow of workers over borders. For example, the competition for talented knowledge workers that exists between developed nations.

Global Economy

Due to trade and markets, the economy of most nations are interlinked to a great extent. This is known as the global economy. For example, an economic crisis in one nation can influence economic growth and stability on a global basis.

Financial System

The institutions that make up the markets and infrastructure of financial exchange such as banks and stock markets. These often operate over borders or have interconnections with a large number of international counterparties.

Monetary Policy

Monetary policy is the control of money and lending by governments. In a global economy, the monetary policy of one nation can influence the economy of all nations. This can result in cooperation, competition and disputes between nations. For example, a competitive devaluation whereby countries compete to make their currencies lower to boost exports.

Economic Cooperation

Institutions and agreements for working together on shared economic goals such as global economic growth and stability. For example, a project to build transportation infrastructure that spans multiple nations.

Economic Bads

Agreements and cooperation between nations to reduce economic bads. For example, two nations that border the same lake that agree to limit dumping of industrial waste into that lake that would greatly harm both sides.

Bilateral Relations

Agreements and cooperation between two nations. For example, two nations that reduce trade barriers to benefit from comparative advantage.

Multilateral Relations

Agreements and cooperation between multiple nations. For example, an entire region that agrees to a ban on child labor with an international agreement.

Globalization

Globalization is a long running process whereby nations are becoming increasing interconnected. This is inherently turbulent and contentious as this can change culture, cause economic disruption and limit the powers of local and national electorates as they become bound by international agreements.

Golden Arches Theory

The Golden Arches Theory is a capitalist peace theory that states “No two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s.” This was put forth, as a humorous analogy, by political commentator and three-time Pulitzer Prize winner Thomas Friedman. Counterexamples for this theory do exist but its underlying idea may be valid — that global economic interconnections give nations incentives to resolve disputes peacefully.

Cost Leadership Strategy

Cost Leadership Strategy Jonathan Poland

A cost leadership strategy is a business plan that aims to reduce unit costs for a product or service to the lowest level among all competitors in an industry. This is typically achieved by becoming more efficient than the competition in a number of ways, such as using cheaper materials, streamlining production processes, or implementing advanced technologies. By reducing unit costs, a company that employs a cost leadership strategy can offer its products or services at a lower price than its competitors, making it more attractive to consumers and giving it a competitive advantage in the market.

Automation

The use of systems and robotics to reduce the amount of labor that goes into the production of a product or delivery of service. General corporate overhead can also be automated. For example, a firm that completely automates customer billing such that human involvement is minimal.

Know-How

Knowledge and knowledge processes can reduce costs. For example, an unusually skilled customer service representative may increase customer satisfaction at a hotel more than expensive renovations to rooms.

Organizational Culture

Organizational culture has a significant impact on productivity, risk management and cost reduction efforts. For example, a CEO who takes economy class flights to set an example for frugality across a firm.

Tools

Tools such as application software, equipment and machines can dramatically improve the productivity of employees. For example, a farmer with a combine harvester that breaks down once every 10 years will be more productive than a farmer with a combine harvester than breaks down every 5 hours.

Scale

Unit costs tend to drop as you achieve greater scale. This is known as economies of scale. For example, a farmer managing 500 acres of apple trees may produce a bushel of apples for $4 where a farmer managing 5 acres has costs of $7 a bushel.

Sourcing

Cost leadership depends on low input costs such that purchasing is an important consideration. Purchasing benefits from economies of scale whereby you are likely to get a bigger discount if you buy more. For example, a big box retailer that purchases a million units of shampoo a month for $2 a bottle where a family corner store buys the same product for $4 because they only purchase 20 units a month.

Location

Location has a large impact on costs such as land, labor, electricity and supplies. For example, a hotel 4 blocks from a beach may cost $5 million where a hotel the same size on the beach represents a $50 million investment. This gives the further hotel far less capital costs such as interest expense such that its cost for offering room inventory is fundamentally lower.

Cost Innovation

Cost Innovation Jonathan Poland

Cost innovation is the practice of finding ways to significantly improve value while reducing costs. This can be achieved through a variety of means, such as improving efficiency, streamlining processes, and using new technologies or materials. While innovation is often associated with adding new features or functions to a product or service, cost innovation is critical to the competitiveness of businesses and countries. By finding ways to deliver more value at a lower cost, companies can improve their profitability and gain a competitive edge in the market. Cost innovation is therefore a key focus for many organizations, as it can help them to remain competitive and thrive in a rapidly changing business environment. The following are illustrative examples.

Automation

Automating toil to reduce labor costs and improve speed and quality. For example, an ecommerce fulfillment center that automates the process of picking orders with robotic systems to dramatically increase order throughput and reduce fulfillment cost.

Elimination of Waste

Reducing wasted time, effort and resources. For example, a factory that implements an innovative maintenance program that dramatically reduces the cost of production line downtime.

Dematerialization

Dematerialization is the process of using less materials without reducing value. In many cases, materials can be completely eliminated with a digital equivalent. For example, a streaming media service as opposed to an overpackaged DVD product.

Lightweighting

The design of things to be lightweight to reduce costs. For example, the use of advanced composite materials in aircraft that dramatically reduce fuel consumption.

Productivity Tools

Making tools more productive for users. For example, professional video editing software that uses AI to automatically identify entities in a scene such that they can be marked for processing. This may save a video editor hundreds of hours a year and reduce costs for a studio or project.

Economies of Scale

Producing a billion units a year tends to be much cheaper per unit than producing a million units a year. This effect is known as economies of scale and is a fundamental approach to cost innovation. For example, a bakery that redesigns its production line to produce 90% more units an hour may reduce unit costs by 20%.

Mass Customization

Mass customization is the process of manufacturing unique and customized items without sacrificing scale. For example, a single soap production line that manufacturers different soap formulations and form factors for different customers without every slowing down to reconfigure the line.

Sourcing

Dramatically reducing costs by focusing on your competitive advantages and sourcing to firms with superior economies of scale where possible. For example, a bank that sells its data centers in favor of using computing platforms provided by major technology companies that are an order of magnitude cheaper.

Efficiency

Improving the efficiency of automation, equipment, processes, practices and services in a dramatic way. For example, a government that allows most people to renew their drivers license online such that they dramatically reduce staffing and location costs.

Race to the Bottom

In many cases, customers buy on price alone such that firms with the lowest costs have a fundamental competitive advantage whereby they can beat the prices of competitors and remain profitable. This can create a race to the bottom whereby quality declines rapidly as firms aggressively innovate to reduce costs. For example, a reputable glassware company that begins to replace metal and borosilicate glass with less durable and attractive materials such as plastic. This will certainly reduce costs but may damage the brand as customer satisfaction drops and new competition step in to improve quality.

Storytelling

Storytelling Jonathan Poland

Storytelling is the act of using narrative to communicate information in an engaging and memorable way. Businesses can use storytelling to share information about their identity, proposals, goals, strategy, plans, history, culture, value proposition, risks, and issues in a way that is interesting and engaging. Business stories may be based on factual information or may include fictional elements, such as humor, anecdotes, examples, and thought experiments, to make the information more interesting and relatable.

There are several common techniques that businesses can use to develop effective business stories. For example, businesses can use anecdotes and examples to illustrate key points and make their stories more relatable. They can also use humor, analogies, and other figurative language to make their stories more engaging and memorable. Additionally, businesses can use storytelling to create a clear and compelling narrative that helps to communicate their message in a way that is easy for their audience to understand and remember.

Business storytelling is the use of storytelling techniques to communicate information and motivate stakeholders such as investors, employees and customers. Stories typically aim to build tension to a climax and then resolve things. Other common elements of storytelling include humor, emotion and familiar examples.

Who We Are
The story of your founders, employees or culture.

Why?
Your mission and why it is urgent and valuable.

Vision
Paint a compelling picture of the future. How do you plan to make the world a better place?

Good Business
A concrete and specific example of the positive impact you have had on communities, individuals and/or the environment.

What We Learned
A mistake you made and how it lead you to change.

How We Design It
Design stories such as alternative designs that never made the cut or the story of your lead users.

How We Do It
Explaining how things are done in your industry, firm or profession. For example, audiences may be surprisingly interested in how everyday products are produced.

Meet Our Customers
Interesting ways that your real customers use your products and services.

Overall, storytelling is a powerful tool for businesses that want to communicate information in a way that is engaging and memorable. By using storytelling techniques, businesses can make their information more interesting and relatable, and help their audience to understand and remember the key points of their message. The following are common storytelling ideas.

Benchmarking

Benchmarking Jonathan Poland

Benchmarking is the process of comparing the performance of a business, product, or process against other businesses, products, or processes in the same or a similar industry. The goal of benchmarking is to identify best practices, areas for improvement, and potential opportunities for innovation.

To conduct a benchmarking study, businesses typically gather information about their own performance as well as the performance of other companies in the industry. This information may be gathered through a variety of sources, including financial reports, customer feedback, and industry data. The data is then analyzed to identify key trends and insights, and to compare the performance of the business against its competitors.

One key aspect of benchmarking is identifying areas for improvement. By comparing their performance to that of other companies, businesses can identify areas where they are underperforming and develop strategies to improve. For example, a business may discover that its competitors are achieving higher customer satisfaction ratings or lower operating costs, and use this information to develop strategies to improve its own performance in these areas.

Another important aspect of benchmarking is identifying best practices and potential opportunities for innovation. By understanding the strategies and approaches of other companies in the industry, businesses can identify practices that are working well and consider incorporating them into their own operations. Additionally, benchmarking can help businesses to identify potential opportunities for innovation, such as new business models, products, or services.

Overall, benchmarking is a valuable practice for businesses that want to improve their performance and stay competitive in their industry. By comparing their performance to that of other companies, businesses can gain valuable insights and develop strategies to improve and innovate. The following are examples of benchmarking.

Technology

A database firm benchmarks the query performance of products against the competition on a regular basis as part of their product development efforts.

Financial

A utility provides investors with a comparison of financial metrics such as operating margins against industry averages.

Marketing

An airline hires a consultant to benchmark customer service metrics such as customer satisfaction against key competitors.

Processes

A telecom company implements a new process for provisioning and benchmarks its results against industry best practices.

Markets

A trading firm benchmarks the decisioning and trading speed of its algorithms compared to what is known about the competition on the same exchange.

Services

A firm benchmarks its average fulfillment and delivery speed against key competitors.

Cities

A city benchmarks its quality of life measurements against other cities in the region or world.

Governments

A state benchmarks its healthcare costs and indicators of health such as life expectancy against other states in the same county.

Products

A solar module manufacturer benchmarks the conversion efficiency of its products against other solar manufacturers on a global basis.

Strategy

A social media firm benchmarks its spending on research & development against close competitors in the industry.

Operations

An IT operations team benchmarks its uptime against a top competitor that published their uptime figures in a media report.

Productivity

A data center is moving towards automating time consuming maintenance and support tasks. Before the project begins they seek employee productivity benchmarks from a consultant who is familiar with best practices in the industry.

Retail

A shoe retailer compares their sales per square foot with industry peers.

Variable Expenses

Variable Expenses Jonathan Poland

Variable expenses are expenses that can fluctuate over time, making them more difficult to budget and predict than fixed expenses. Fixed expenses are those that remain constant and predictable, and are often used as the basis for budgeting and planning. Examples of variable expenses might include utilities, transportation costs, or raw materials, while examples of fixed expenses might include rent or salaries. By understanding the difference between fixed and variable expenses, organizations can better manage their resources and make more informed decisions.

Business
In the context of business, a variable expense is most commonly an expense that rises with production levels. Variable expenses also include strategic initiatives such as a project that is expensed. Variable expenses can be contrasted with overhead such as the cost of your HR team that doesn’t change with your business volumes or strategy. Some types of taxes such as property tax are typically a fixed expense. Income tax tends to be highly variable according to income and expenses.

  • Advertising
  • Bad Debt Expense
  • Commissions
  • Components
  • Consulting
  • Cost of Goods Sold
  • Delivery
  • Direct Labor
  • Electricity
  • Foreign Exchange Loss
  • Freight Inventory
  • Marketing Expenses
  • Materials
  • Professional Fees
  • Strategic Initiatives
  • Subcontracts
  • Supplies
  • Taxes
  • Travel Expenses

Personal
Personal variable expenses includes costs that are discretionary, unpredictable, one-time, unusual or that go up and down according to usage. These can be budgeted for with categories such as contingency and discretionary. In many cases, it is possible to convert a variable cost into a fixed cost. For example, insurance that covers medicine. It is also common for services to offer fixed rate pricing such as a streaming media service that offers entertainment for a fixed monthly fee.

  • Appliances
  • Bedding
  • Clothing
  • Disasters (e.g. Flood Damage)
  • Electronics
  • Energy & Fuel
  • Entertainment
  • Eye Care
  • Food
  • Footwear
  • Furniture
  • Haircare
  • Home Furnishings
  • Internet & Communications
  • Luxuries
  • Medicine
  • Out-of-pocket Medical
  • Repair
  • Restaurants
  • Toiletries
  • Travel
  • Utilities
  • Vacations
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