The new business theme: Love the product, hate the producer

John Kay is one of UKs leading economists. He was the founding Dean of Said Business School, University of Oxford. He writes for the Financial Times.

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A central theme of this book is that business has evolved but the language that is widely used to describe business has not.

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In modern business, the boss cannot issue instructions like Henry Ford or Andrew Carnegie did. Modern bosses don’t know what the instructions should be.

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The modern business is characterised by radical uncertainty. It can be navigated only by assembling the collective knowledge of many individuals and by developing collective intelligence.

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Collective knowledge is the collective accumulations of facts and theories.

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The 21st century company is defined by human capabilities and not its physical capital.

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Profit, hence, is not a return on economic capital but ‘economic rent’.

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The purpose of an economic organisation is to create combinations of factors of production that yield more value than the same factors would in alternative uses.

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GM and IBM failed for the same reasons that the Soviet Union did—they didn’t adapt to changing needs and technologies.

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The term stakeholder was popularised in 1984 in a book by R Edward Freeman, who used it to refer to the range of people and organisations who have a legitimate interest in the business performance.

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Business reputation has suffered many blows in the last two decades.

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The elaborate artificial tax avoidance schemes that have become commonplace among large MNCs is attracting public attention.

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The successful companies of the modern economy are not well regarded by young people.

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Love the product, hate the producer is the new theme.

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The pharma industry illustrates modern business at its best and its worst.

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Organisations exist because human beings can collectively do things that they cannot do individually.

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Flow is the elation that comes from complete engagement in the successful performance of a difficult task.

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Labour and capital can be substituted for each other but application of more capital on fixed labour or more labour on fixed capital will yield diminishing returns.

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Industrialisation helped produce more cities, the leaders of these industrial revolutions not just built factories, but communities.

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Both business people and critics of business exaggerate the benefits of size.

The advantages are tech and the disadvantages are mostly human and are less visible.

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In the modern business value comes from not building something bigger but from creating something smarter.

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Modern economic growth is about building collective intelligence into familiar resources to create new products and still more advanced capabilities.

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The accumulation of collective knowledge and the development of collective intelligence have made humans better at almost everything.

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In the 1924 Olympics, Harold Abrahams, the gold winner, employed a personal coach, Sam Mussabini, and this was seen as cheating.

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The achievement of people like Messi is both a combination of competition and co-operation.

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The rationale of an economic organisation is that it adds value, but what is value, that has changed.

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In every society prized objects tend to be appropriated by those who have power—economic power, political power, or simply brute force.

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Willingness to pay is the combined product of need and want and the ability to pay.

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In a market economy, price is a source of information.

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Economic rent is the difference between the returns of an activity and the opportunity cost of the resources needed for that activity—the returns to these resources in their best alternative activity.

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Organisations derive rent from distinctive capabilities.

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The 1960s were an era of social and political turbulence—The Beatles revolutionised music, skirts shortened and the contraceptive pill became widely available.

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Real business people operate in large worlds, where the right answer is not apparent, even in retrospect.

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The world is radically uncertain, information is imperfect. No contract can anticipate all contingencies.

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The fame and success of Silicon Valley was facilitated by venture capitalists like Sequoia and Kleiner Perkins. Sequoia invested in Apple and Kleiner in Amazon.

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At worst private equity has been a means of extracting money from business by managing short term earnings. Cost cutting finally leads to leaky pipes and overflowing sewage.

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In 1967, the first Boeing 737 was sold by Boeing to Lufthansa, a year later the 747 made its debut. Boeing prized itself on aviation engineering.

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The results of greater financial metrics in business are initially pleasing for the stock market.

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All activities that analysts laud take away attention from the central issues in a company.

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The modern firm is a community rather than an office; it is defined by its capabilities.

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Early commercial organisations like the East India Company were organised as rigid hierarchies with a distinct uniform at every level.

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Hierarchy requires distinct chains of authority, responsibility and accountability.

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Many people find the exercise of authority attractive but the obligations of responsibility and accountability burdensome.

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The most common device for diluting or deflecting accountability is the meeting.

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All organisations need managerial authority and technical expertise.

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Cooperation and collaboration require trust.

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Selfishness erodes trust.

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Platform companies like Airbnb, Uber are hollow organisations; their key capability is redefining the business model.

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The means of production of modern businesses are elusive.

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The skills of a successful professional manager are distinct from that of an owner.

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You can rent human capital as a service, but cannot buy or sell it.

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