Today at TILE we continued to talk about the tensions that exist within economies. When does one player have a competitive advantage over the other? Does it always make sense to widen the gap if you are the one with the edge? How does the disadvantaged player close the gap?
In the context of today’s headlines, there are a few examples of how competitive advantage (and disadvantage) plays out in the economy. For example, the dynamics between developed and developing nations in Copenhagen climate talks, between Wall Street banker pay and the national unemployment rate, and TARP versus non-TARP firms.
Did you notice that the developing countries staged a walk-out in Copenhagen to protest the lack of cooperation they perceived coming from the developed countries? In essence, they were saying, “you enjoyed economic growth without any constraints on energy use… so either let us do the same, or compensate us for the new rules.” On the other hand, the developed countries, in general, said “we are only willing to sacrifice so much.” In this context, there is a greater good involved – fighting climate change – that can and should drive each side to find a middle ground. Nonetheless, the “haves” are not always willing to make enough of a sacrifice to incentivize the “have nots” to change the game.
There also seems to be tension between Wall Street and the unemployed. While Wall Street looks to be doling out record bonuses this year, many average Americans are still suffering through a drastic period of high unemployment rates. This “standoff” between the two groups plays out in Washington, DC, where we will find out who has the most influence in shaping government rules and regulations. Wall Street is lobbying for more freedom, more tax breaks, and less intrusion. Main Street is asking for help in the form of loans to small businesses, job creation, and social services.
We also see competitive advantage play itself out in the TARP versus non-TARP firms. Those companies that have paid back TARP funds are less encumbered by government oversight (e.g. on compensation and capital). This means they can compete more easily in the marketplace for talent and deals (because they can pay more competitively). In order to overcome this competitive disadvantage, firms like Citigroup and Wells Fargo went to market in a rush this week, selling large amounts of equity at discounted prices in order to pay back their bailout funds. Traditionally, selling at a huge discount is not something you would do unless you felt you were at a serious competitive disadvantage.
What is most important is simply to recognize that more often than not, countries, companies, and individuals do not compete on a level playing field. The perception of strength will dictate strategy. Remember that story about the turtle and the hare? At the same time, if the player who is at a disadvantage thinks there is no chance to compete or catch up, they may just walk away – and that might not necessarily be the best outcome in the long run for anyone. Think about it: consumers benefit from increased competition (better products, better prices) and citizens benefit from countries’ desire to have a cleaner planet.
What does this mean for the TILE Community? In economics it is really important to consider positioning – advantaged or disadvantaged. Do the companies you have in your portfolio have a specific advantage over others in their industry? Is that a part of your investment decision process? On a personal level, what advantages do you have over others? Is it always the best strategy to make that gap wider, or are there times when you might help others that are looking to reach a similar goal? Appreciating the tensions will help you find the best strategy – in the world of finance and in life.
- Amy