Breakpoints are sudden changes in markets. Here’s a notable example. In the 1980s, the cost of Medicare was rising rapidly, and, at the same time, the Federal government was worried about resources to fund Medicare. (That was a time when federal deficits mattered, but I digress.) The two opposing trends—each getting stronger as time passed, neither giving way to the other—created a forced sudden change. In this case, the federal government rapidly changed Medicare reimbursement from “cost-plus” reimbursement to prospective payments, a set amount per clinical procedure code. The change was not just rapid but highly disruptive. Hospitals did not have cost-accounting systems yet, so imagine their plight with no insight into where their gross margins were being made or lost. Lengths of stay dropped dramatically, and medical supplies and product providers needed to deliver “better” offerings (translated into better financial results for…
Strategies for the Connection Economy Crisis
Who knew? It’s not the technology economy or the service economy that drives our nation’s Gross Domestic Product. It’s the connection economy, a sector that the COVID-19 virus has sadly brought into a swift and costly downfall, and likely business-altering event. The connection economy consists of activities where people convene proactively for fun, commerce, or learning activities. Sports. Education. Restaurants and bars. Movies. Sightseeing activities. Office, plant, and location work. In-store retail. Canceling an event has significant multiplier effects on industries that are part of the process. Consider the cancelation of the Final Four NCAA tournament. Plane fares, gasoline, restaurants, hotels, Lyft/Uber drivers, t-shirt companies, arena fees, and contract work all disappear. The cancelation of South by Southwest will cost Austin $355 million, and that does not include all the ad agencies and performance artists whose work disappeared. And these examples are merely…
Are “Too Big” Companies Proof that Capitalism is Bad?
The Democratic presidential primary pitted an anti-capitalism leader against a set of moderate contenders, with Elizabeth Warren straddling both by arguing about breaking up too-big-for-our-good companies to encourage more capitalistic competition. Who is right? There are three main mechanisms by which companies get really big: (1) by capturing economies of scale that give bigger sized companies an inherent advantage; (2) by developing or acquiring non-competing, synergistic products that accelerate growth; and (3) by acquiring direct competitors to gain control in a market and reduce supply. Facebook and Google are examples of #1. An example of #2 is Intuit acquiring Turbo Tax to extend its line of personal finance tools. The airline mergers are a classic example of #3, which in this case led to industry consolidation. It’s within that third strategy—acquiring the competition—that you can easily find fodder to both defend and criticize…