The Pebble and the Avalanche

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Current Revolutions in Business and Technology

by Dr. Moshe Yudkowsky,

author of The Pebble and The Avalanche: How Taking Things Apart Creates Revolutions


Thu, 2007-Mar-08, 07:47

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"High Barriers to Entry and High Barriers to Exit"

Millions upon millions of ordinary Americans own real estate — homes, apartments, and the like — and thousands of independent builders and contractors create these buildings for them to purchase. Even more Americans own automobiles, but for some curious reason only a handful of companies build automobiles.

Rick Wagoner, the CEO of General Motors, discussed the problem of overcapacity in the automobile industry:

"It''s hard to take capacity out. It''s expensive. There are frequent union issues. There are government regulations," he said. "The auto industry has high barriers to entry and high barriers to exit."

Allow me to re-state this idea. The large automobile manufacturers, along with the labor unions, promoted intervention by government regulatory agencies to create high barriers to entry; not surprisingly the government also created high barriers to exit. The high barriers to entry prevent competition, encourage monopolies, and stifle creativity — all to the benefit of the established companies. But what goes around comes around; when competition finally arrived, from "foreign" manufacturers and non-union labor, the introduction of creative new ideas have succeeded in pushing domestic monopolies to the brink of extinction.

Fri, 2007-Feb-09, 07:17

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US Automakers and the Dealership Reservoir

Although the Big Three automobile manufacturers in the US continue to struggle, they do have one terrific advantage: the network of car dealerships. The automakers manufacture cars and then send them to the dealerships, who arrange financing for the cars and absorb the output. This disaggregation between manufacturing and end-user sales is a very common arrangement in any industry, but in the case of automobile manufacturing, the system has failed for lack of feedback.

The automakers use this system to insulate themselves from market realities. They pressure dealerships to accept the automobiles they produce, and since the dealerships bear the cost of unsold vehicles, the automakers are insulated from marketplace signals about how well their vehicles are selling. Unlike a Wal-Mart or a Target, the dealerships cannot go to dozens of competing suppliers; the US has only three "domestic" automobile manufacturers. If the automaker sends a car in an unpopular configuration, such an unpopular size of wheels or an engine that is too large or too small, the car sits in the dealer's lot for months on end.

In essence, the dealership system acts as a reservoir for the automobile makers where automakers dump their unsold cars. The problem is that this reservoir is expensive to operate — for the dealerships — and the dealerships are starting to revolt against the system.

But with the rise of dealership chains, this reservoir system is about to end. AutoNation, which owns many stores across the US, has decided to take the automakers to task and is starting to demand that automobile manufacturers send it cars that are popular with AutoNation's customers [WSJ, subscription] instead of whatever cars are easiest for the automakers to produce. AutoNation is attempting to introduce stronger and more robust feedback into the disaggregated supply chain, and it will be interesting to see what the result will be.

Wed, 2006-Sep-06, 15:09

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Un-Disaggregating the Cost of "Free Parking"

Who pays for a "free" parking space? According to Professor Donald Shoup, all of society does; to put it in our terms, free parking disaggregates the cost of parking a car from the cost of driving the car but does not provide a feedback mechanism to help moderate how people drive and park their cars.

While the idea intrigues me, I don't endorse it; anti-car activists cite the professor's work to support their agenda of forcible adjustment in US driving habits. And I'm not entirely certain that the professor's notion is sound, because I suspect that I can make the same argument about sidewalks, traffic lights, sewers, police offices, fire hydrants, and all the other amenities that make city life possible. I guess I'll just have to wander over the university library...