Fading Microsoft and Ascendant Google

Microsoft owns the world of PC computing. The reinforcing loop between Box 1 and Box 2 underscores that fact. Microsoft pays their geeks especially well to write software (Box 1) and Microsoft’s success (Box 2) in turn attracts more geeks to their ranks. But Microsoft eventually loose their "cool factor" (Box 3) when they fail to continue to be the "happening place". No more sexy products to build or world class problems with world class impact to solve. The virtuous cycle between Box 1 and Box 2 slows when Box 3 appears for Microsoft.

Therefore Microsoft’s stock begins to under perform. It becomes more like a utility than a growth stock. The market however is always looking for growth opportunities. That opportunity is now filled by the likes of Google and Yahoo (Box 4). The virtuous cycle that Microsoft is enjoying is fading and shifting right to a growing virtuous cycle between Box 1 and Box 4. The search engine leaders has the toughest technical problems that attracts the best people with the greatest potential impact on how we use the Internet.

An ascending Google will steal the wind from Microsoft’s sails (see dashed arrow from Box 4 to Box 2) unless Microsoft is able to snatch the wind from someone else. It is trying with its Xbox to usurp Sony’s Playstation, which is perhaps the only other cool place it might have a chance to win.

The best days for Micrososft could be over. A company that expends extraordinary resources on product and service security to raise reliablity fits to a t, a description of what a utility company is. Nowadays you buy Microsoft for the dividends. Look elsewhere if you want growth.

The Life Cycle of a Meritocracy

For many years we saw that Meritocracy was good for any society that practiced it. It is a reinforcing loop and a virtuous cycle as shown in the relationship between Box 1 and Box 2. Meritocracy helps to identify and groom the able and make them successful (Box 2).

Unfortunately all good things will eventually decline and come to an end, Meritocracy notwithstanding. It seemed that when a huge numbers of able individuals have been identified and groomed (Box 3), Meritocracy seem to only suggest that the offspring of the successful parents are the most meritorious – See the dashed arrow from Box 3 to Box 1. E.g., The elite schools used to receive students from families with mixed backgrounds, now those who come from humbler families are an increasingly small minority. What are the consequences?


Meritocracy will eventually breeds a new elite that mostly reproduce the next generation of elite. This is the new reinforcing loop between Box 2 and Box 4. The logic of the reinforcing loop between Box 1 and Box 2 becomes yesterday’s logic because Box 3 has appeared to slow the virtuous cycle. At the same time, a new under class will emerge (Box 5).

Eventually the environment will change and the new elite (Box 4) will become the old ossifying elite and get supplanted as they finally fail to adapt to an changed environment. The society might then return to the former logic of Box 1 and Box 2 that will eventually produce the next elite, which is more compatible with the changed external environment. However there is no guarantee that this will happen. The society might enter into a dark age instead of clearing the ground to create the next golden age.

Globalization: Who Wins

Under normal circumstances the relationship between Box 1 and Box 2 should be a counterbalancing loop rather than a reinforcing one. But if competition is very intense, what results is reinforcing loop. This is the current reality.

Box 2 inevitably leads to laying off workers (Box 3). Also the relationship between Box 2 and Box 3 this should be a counterbalancing loop instead of a reinforcing one. The more workers are laid off, the less willing society is able to tolerate more job cuts. So the arrow from Box 3 to Box 2 should be a dashed arrow. But if a society have forged a very strong social compact (Box 1a), we will see a reinforcing loop instead. And all this is driven by a very powerful Box 1 created by a globalizing environment.

Box 2 is unsustainable unless it yields an expanding economy (Box 5) that is a net creator of jobs, and eventually higher quality jobs. It will soak up the surplus labour (Box 4). If Box 5 accelerates too quickly, then wages will begin to inflate. It is a counterbalancing loop between Box 5 and Box 4.

This NaviMap is similar to the previous case except that Box 1a – the social compact, is absent. In most societies, no matter how intense competition (Box 1) is at pressurizing for restructuring (Box 2), the pace of restructuring is paced by how much that society accepts massive lay offs of workers. The relationship between Box 2 and Box 3 is usually a counterbalancing one. As a result, Box 5 for this scenario is an economy that is expanding more slowly than the previous example. Fewer people are laid off and it is also harder for them to find new jobs compared to the first case. This society will achieve lower economic growth and eventually lower family incomes than the former case.

The MP3 Gadget Wars (Apple, Creative and Others)

Apple’s ability to stay ahead in the personal digital technology market is their special ability to tell consumers what is cool (something which Sony used to be able to do), i.e., Box 1 in Map 1. Their products, in this instance the iPods are not asking consumers what they want but surprising them with WOW designs in an MP3 player such that they become lifestyle items.

Apple endeavors to bring on products that enjoys the virtuous cycle shown in Map 1 between Box 2 (WOW you emotionall products) and Box 3 (Consumers vote for their products). This virtuous cycle is supported by their Box 1.

Creative Techology wants to occupy the pole position in MP3 players. Its strategy is to provide superior performance and features at a price point that is better than Apple (Box 4). They hope to own a virtuous cycle as shown between Box 3 and Box 4. Were they successful, the market would have signaled that consumers prefer performance and features (Box 4) over emotional appeal (Box 2). Sales data of the two companies products show that the virtuous cycle between Box 3 and Box 4 for Creative Technology is not as strong at the virtuous cycle between Box 3 and Box 2 that is owned by Apple.

As the market for MP3 players grow and mature, the virtuous cycle between Box 3 and Box 4 should become stronger than Apple’s controlled Box 2 and Box 3. By then Apple would have moved on to something else (Box 1) after Steve Jobs has divined where consumers want to be.

In the meantime, Creative Technology risks being sandwiched by cut throat priced products from the bottom e.g., Samsung, and the iPods from the top – See Box 5. Therefore the window for the virtuous cycle of Box 3 and Box 4 could be so small that Creative’s performance could really suffer. In this game that Creative has entered, they had no choice but to oust Apple or be prepared to move down market and valiantly defend their territory against all comers.

Creative never had Apple’s "Box 1" advantage. The market for MP3 players though growing rapidly, wasn’t fast enough for enough consumers to be part of Creative virtuous cycle (i.e., Box 3 and Box 4). When the market becomes much larger, it will also be the time when it is crowded with many competing suppliers. Prices for MP3 players can only head south. Another round of severe cost cutting at Creative looks inevitable as it fights for survival and fashions a comeback strategy.

End of the smarter sales strategy

This continues from yesterday’s post. No reinforcing loop last forever. In the above diagram, there are two such reinforcing loops between Box 1 and Box 2, Box 1 and Box 3. One possibility is that Box 1 might at some point in time innovate (Box 4) on what it offers to Box 2. Well that might keep Box 2 happy by anticipating your coustomer’s needs, it is likely to disrupt the reinforcing or virtuous cy cle between Box 1 and Box 3 (see dashed arrow). If Box 3 fail to respond successfully, the virtuous cycle between Box 1 and Box 3 slows or ends.



In an alternative scenario as shown above, Box 2 instead Box 1 could be the innovator (Box 5). If Box 1 fails to respond successfully to Box 2 changing requirements then the virtuous cycle between Box 2 and Box 1 will be negatively impacted. This will als be to the detriment of Box 3.

There are other possibilities to these two scenarios but the important point to take away is that no virtuous cycle or reinforcing loop lasts forever. So if you have worked your way to a sweet spot, do not be complacent.

The smarter sales strategy

If you are a salesperson, your best customers are those who are themselves enjoying healthy and repeated sales with the customer’s customer. Such a story is shown in Map 1 as the virtuous cycle between Box 1 and Box 2.





If you are the salesperson, the smart strategy is not concentrating your efforts solely on Box 1. Instead, focus on Box 2, which will offer you the insight needed to serve Box 1 better. Your objective is to understand the nature of the virtuous cycle between Box 1 and Box 2 as well as possible. The quality of a virtuous cycle of repeat sales, i.e., between you (Box 3) and your customer (Box 1) will be determined by your relationship with the customer’s customer (Box 2).

Terrorism: Drawn into the wrong war

In the war against Terror, it has become clear that we are trapped in a vicious cycle with the enemy. As we invest more in security; hardware, software, systems and even behavior adjustments (Box 1), the terrorists are just determined to try harder (Box 2). Also the cost to us is disproportionately higher than them at each iteration of this loop. Furthermore they usually have the initiative to engage us at the place and time of their choosing. How long can we sustain this vicious cycle against them? No reinforcing loop lasts forever. Before either side dies from exhaustion, we may be heading of a "lock out" position, i.e., our cities are so heavily secured such that the terrorists find it impossible to hit us (Box 3) - see dotted arrow to Box 2, but it could also mean that our cities could no longer exist in the way they are meant to function, rolling back our desire to generate wealth with globalization (Box 4) - In fact, wealth will contract and freedom curtailed.

The war that we really need to fight and win is the one that supports Box 2 - The Terrorists' mistaken ideology of creating a global Islamic Caliphate according to their warped understanding of Islam (Box 5). This ideology arose as backlash to globalization (Box 4). And if the terrorists can fight modern civilized society to the Box 3 situation, it would be such a huge setback to a free and globalized world (Box 4) that even as we exterminate the terrorists, what we achieve is nothing but a pyrrhic victory. Therefore it is imperative that in our war against terrorism, we need a viable strategy against their ideology (Box5). The war that we are waging as a vicious cycle between Box 1 and Box 2 was inevitable as they had the advantage of initiative. We are not likely to win that war given their extraordinary determination, but with our resources, we must use it to buy time.

If we fail to overcome Box 5, we loose this war. It might be a long time coming, but it will come.

The Coming Singapore's Property Bubble?

Is there a property bubble looming ahead of us? On July 19, the National Development Minister announced several liberalization measures that would encourage more participation in the residential property market. The cash downpayment for a property buyer is reduced from 20% to 10%. This is represented as Box 1 in the diagram. This should eventually lead to Box 2, i.e., more mortgages will be written. What is next is interesting.

If lending institutions chose to raise mortgages rates (Box 3), then this will moderate Box 2 (represented by a dashed arrow), and any property bubble is nipped in the bud.

If mortgage rates are static or only marginally increased, a more rapid take up rate could lead to rising property values (Box 4). In such a situation, the expectation of higher property prices will create a reinforcing loop between Box 2 and Box 4 leading eventually to a full blown property bubble. At that point only very severe economic news (this will be a shock) or government measures to deflate the bubble will reverse the trend of rising prices.

Now everyone is watching which scenario it would be. I am sympathetic to rising property prices after a slow start.

Latest: I just caught this at ChannelNewsAsia site to support this thesis. See "Developers say strong sales due to recent policy changes "