Friday, July 31, 2009

Market Rebels

Author:Hayagreeva Rao, Hardcover: 222 pages

Princeton University Press; 1st edition, 2009, US$24.95

Hayagreeva Rao wants you to "stop thinking like bureaucrats and to start thinking like insurgents." In Market Rebels, Mr. Rao explains how market rebels, i.e., social activists, can either enable or constrain radical business innovations, and in so doing these rebels represent either a potential opportunity or pose threat to businesses.

Relying on examples of how the automobile became popular in the early twentieth century, or why the cochlear implants were shunned by the deaf community, or what lead to the success of micro brewing, or how shareholders' rebelled against corporate boards, Mr. Rao describes the social activism that either contributed to the success of certain radical innovations or hampered the possible growth of other.

Market Rebels identifies social movements as collective struggles to bring about social change. Such movements are born to "reshape markets when normal incentives are inadequate and when actors are excluded from conventional channels of redress to address social costs." For instance, when ordinary share holders were preempted from sponsoring resolutions at annual meetings, they rose in revolt to institute change that made corporate boards more accountable.

Giving examples of how social movements can help radical innovations succeed, Mr. Rao describes the case of private automobile and its acceptance by the public in a relatively small time. When the private automobile was first introduced, some opposed the idea and called cars a "devilish contraption". Up until the beginning of twentieth century, for the past thousands of years human beings had commuted either by foot or by animal driven carts. The introduction of private automobile was indeed a radical idea. So how did the automobile gained cultural acceptance and legitimacy?

Mr. Rao argues that the acceptance of the private automobile was largely driven by private clubs of automobile owners who popularized the use of private automobile. In fact, the American Automobile Association began as an umbrella group of local auto clubs in the early 1900s. It was partly due to the initiatives of such clubs that helped popularize the private automobile and addressed the concerns of those who opposed it.

After describing the success of private automobile almost a 100 years ago, Mr. Rao then attempts to explain why the electric car did not gain the same acceptance. He argues that the electric car failed to attract the imagination of user groups. He particularly points to the lack of interest amongst the California motorists as the reason for the electric cars not gaining ready acceptance similar to the one enjoyed by the first generation of cars running on combustion engines.

While there is merit in most arguments presented in Market Rebels, one may find some reasoning rather reductionist. Whereas the private automobile introduced in the early 1900s qualifies as a radical innovation, cars running on hydrogen or electricity may not be such a radical innovation. Unlike the first generation cars that revolutionized mobility, electric cars in fact offer less mobility (because of frequent recharging requirements) than those running on combustion engine, and at the same time electric cars cost more.

What about Segway, the ultimate innovation in personal mobility. Introduced in 2001, it was believed that Segway would gain mass acceptance by the public and the industry. In fact, it was believed that the courier industry, including the postal services, would adopt Segway en masse. Almost eight years hence, Segway continues to struggle for mass acceptance even after landing coveted celebrity endorsements, including the founder of Apple, Steve Woznik, bought one for himself.

The untold story of Segway also includes resistance from the government agencies including some municipalities in North America that enacted regulations prohibiting its use on sidewalks and in other public places. At almost $5000 apiece, Segway remained unaffordable for most.

Market Rebels argues that lack of social movements promoting Segway is behind the dismal performance of the radical business innovation. Despite the ingenious engineering design, Segway barely qualifies as a radical innovation in mobility. It offers almost the same mobility of an ordinary bike at a much higher price. And unlike cars, which in early 1900s were favored by the rich and famous, who happened to be older than the rest, Segway attracts the younger cohorts who may not have deep enough pockets to acquire this high-tech gadgetry.

Could it be that the marginal increase in utility brought about by the innovation in comparison to the status quo determines the acceptance of a new technology or idea. This implies that the marginal benefit of a new technology when made available at the right time and at the right price determines its mass appeal and adoption.

Mr. Rao refers to Steven Klepper and Elizabeth Graddy who studied 46 industries to determine how long it takes for an innovation to be accepted and adopted. The authors discovered that on average it takes 29 years for a new idea to move from inception to cultural acceptance. Some innovations took only two years to become popular, whereas others took almost 50 years. Klepper and Grady believe that the time it took for innovations to enjoy mass appeal was based on their cultural acceptance.

But what about the right timing? If an innovative idea is introduced ahead of its time, it may not gain mass appeal that it deserves. Market Rebels refers to the movie The Solid Gold Cadillac, which introduced the idea of shareholders activism some 50 years ago. In the movie the character Laura Partridge questions the directors of a company about the perks they had awarded themselves. She then mobilizes shareholders against the directors and wins a Cadillac for her activism.

It was 50 years after the movie that the shareholders of Home Depot revolted against its board for awarding a generous package to its CEO Robert Nardelli under whose leadership the stock price experienced great volatility. At the same time, Lowe's, a competitor of Home Depot, saw its fortunes rise much faster than the Home Depot and for that its CEO received a fraction of remuneration paid to Mr. Robert Nardelli. The opposition by a small number of activists partially contributed to Mr. Nardelli's departure from the Home Depot.

While some social movements succeed, many other do not. Market Rebels explains how small communities continue to resist big box retail. Large retailers such as Wal-Mart often attract strong resistance from communities who fear that the arrival of chain stores may result in a net loss of jobs. However, with Wal-Mart being one of the largest corporations in the world, and big-box retailers outperforming their competition in retail sales, one may argue that despite opposition by social groups, market rebels have failed to stop certain radical innovations, including the big box retail.

There may not be any organized social movements supporting big-box retail, however, the annual 350-billion plus dollars revenue of Wal-Mart suggests that its record-setting sales may in fact be an outcome of a latent social movement of consumers who prefer bargains over other tangible benefits of shopping.

While the social movements may not have succeeded against the big-box retail, they certainly have succeeded against other businesses, such as tobacco. By bringing together lawyers and health advocates, social movements provided the platform against large tobacco companies which saw banning of smoking in public places throughout North America.

Thus, while certain market rebels help promote an idea of innovation, such as the early dedicated computer enthusiasts who put computer terminals in streets as community bulletin boards, other rebels have helped defeat innovations such as cochlear implant. Mr. Rao is justified in warning that social movements may pose a threat to certain ideas and may facilitate mass appeal of certain other innovations.

So if you will be launching a radical innovation, and would like market rebels to be on your side, you must then stop thinking like bureaucrats and start thinking like insurgents.

Sunday, July 19, 2009

Rail tracks and homicides in Toronto

I couldn't help but notice that there were a significantly large number of homicides committed in the vicinity of rail racks in the Greater Toronto Area. There is something about the land use that accompanies rail tracks that makes it more suited for criminal acts.

The annoying neighbours who are often intrigued by what is hot or not in your life act as deterrent against crime. Rail tracks offer no neighbours with prying eyes and hence the higher propensity of crime in such areas. Also notice that the rail tracks form a horseshoe or 'U' in the middle of the city, which also marks the most poverty ridden areas in the GTA

The Toronto Star has been keeping a watch on murders in the GTA. The following website offers a Google map of the GTA with homicides as an overlaying layer. You can click on an incident to read up on details about the crime and its loaction:

The other interesting to notice is that women victims were mostly stabbed, suffocated, or killed with blunt objects. On the other hand, male victims were mostly shot. This sort of suggest the difference in motives behind the crime between male and female victims.

Lastly, the map shows that victims often reflect the ethnic complexion of the neighbourhood where the crime took place. For instance, the suburb of Brampton in the GTA is known for its large South Asian population. A relatively large number of murder victims were of South Asian origin in Brampton.

Saturday, July 18, 2009

Canadian housing market is on road to recovery

Is the doom and gloom in the housing market over? The answer appears to be yes, at least for Canada.

While the US housing market is still struggling with foreclosures and falling housing prices, the markets in Canada are experiencing an upswing. The housing market blues, which began in early 2007 with monthly sales dropping from a high of 45,000 seasonally adjusted sales in May 2007 To 26,000 monthly seasonally adjusted sales in January 2009.

The first two quarters in 2009, however, have experienced a growth in both sales and prices. The seasonally adjusted prices have climbed back to $310,000 in June 2009 from a low of $283,000 in January 2009.

The reasons behind recovery in Canada are manifold. First, the Canadian consumers stayed away from bingeing on debt. Unlike their American peers, Canadian domestic borrowers kept their expenses in line with their incomes. Furthermore, the well regulated banking and mortgage sectors in Canada have maintained a moderate growth in the housing market, even when the credit river was flooding the global markets.

The graph below presents the recovering housing market in Canada where sales, listings, and prices are on the upswing.

Friday, July 17, 2009

HSR is the wrong stimulus

Reference: The right kind of stimulus, Friday, July 17, 2009, The Globe and Mail

The Globe's editorial fittingly praises the federal government for its planned $300 million investment in ViaRail. Regular speed rail service in the Montreal-Ottawa-Toronto corridor is a welcome alternative to other modes of travel. However, Globe's support for high-speed rail (HSR) link in the same corridor is based on perceived benefits of HSR that are unlikely to realize.

The editorial stated that investment in HSR is needed to get "large numbers of people out of their cars." However, previous studies have shown that HSR is unlikely to get commuters out of their cars. Instead, HSR eats into the market share of air and bus modes.

The recently released report by the Alberta government on HSR in the Calgary-Edmonton corridor reinforces the fact that HSR would fail to make a significant dent in the automobile market share, which is currently estimated at 91%. According to the Alberta study, even with HSR operating at 240 km/hour, 95% of trips in the Calgary-Edmonton corridor would continue to be made by private automobile in 2011.*

Mode share in 2011

240 km/h





Grey Hound


Red Arrow


High Speed Rail


Total trips


We in Canada have to acknowledge the fact that HSR is not likely to reduce commuting by private automobile. Investing billions of tax payers' dollars will only hurt the existing public modes of travel, i.e., bus and air, and the livelihoods of those households associated with these public modes. Furthermore, HSR would also make commuting more unaffordable for low-income commuters and students who rely on inexpensive bus service for their essential intercity travel in Canada.

*Market Assessment of High Speed Rail Service in the Calgary Edmonton Corridor, Alberta Infrastructure and Transportation, Feb 2008, page 105.

Thursday, July 16, 2009

High Speed Rail in Calgary

The Globe and Mail in a recent editorial suggested that the strongest argument for high speed rail (HSR) linking urban centers in Southern Ontario comes from the Ontario Government's report, Ontario in the Creative Age, which was written by Professors Richard Florida and Roger Martin of the University of Toronto.

Messrs Florida and Martin have done less than an honest job of relaying the message on HSR from a study, which they had commissioned as a background paper for their report.  The Florida-Martin report pushes high-speed rail as the preferred option for mobility, implying that it may be a financially viable alternative, which is certainly not the case.

In the background paper for the Florida-Martin report, the authors made no claims about the financial viability for HSR in Ontario. In fact, the engineering professors at the University of Toronto, who wrote the background paper, observed that the discussion of financial feasibility of HSR in Southern Ontario was beyond the scope of their study.

It should come as no surprise that HSR comes at a great financial cost and with very limited societal benefits. A series of comprehensive reports commissioned by Transport Canada and the provincial governments of Ontario and Quebec estimated that HSR linking Montreal, Ottawa, and Toronto would have cost approximately $11 billion in 1995. Current estimates would hit $20 to $30 billion.

The 1995 report was full of caveats and observed that High-speed Rail represented "a high financing risk for each party involved", and that a 100% private venture was "neither viable nor financeable" because the borrowing costs for the private sector "would significantly exceed the HSR project's financial returns", and finally the tax payers are most likely to doll out 70% or more towards the capital costs of the project.

Studies have shown that commuting by car, buses, air, and regular rail service is going to be significantly cheaper than travelling by HSR. Hence the environmental benefits of HSR are also unlikely to realize because commuting by car will not be significantly affected by the provision of high-speed rail, which will be too fast to afford for most commuters.