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Wacky Business Idea #10: A Free Market Corporate Structure

Apparently the modern corporate structure was developed shortly after World War 2.  The idea of a hierarchy, where everyone reports to someone above them all the way up to the CEO was modeled on the military structure men returning from battle were familiar with.  I don’t know much about corporate organization, but it seems to me that there would be better ways to organize a company.

Conglomerates were big in the 60’s, where the rationale was that there were economies of scale in merging companies.  It turned out that most of the “gains” were accounting tricks, and in fact the monstrous companies were LESS efficient as they got bigger.  Large organizations with central planning just don’t work.  Look at any government, any military or any large company.  Its a debatable point, but I feel that the benefit of large companies is having the resources to subvert government (through lobbyists) rather than greater efficiency due to their size.

A friend was recently part of a project at the company he works at where they were going to buy technical services from a partner for $200k.  Everyone was ready to go for the deal, but he put the brakes on it.  He said he had to investigate further before he could sign off.  The next day one of the other people in the meeting came up to him and said “I was really angry when you wouldn’t sign off yesterday, but afterwards I talked to some people in my group and we can do the same thing for $50k”.  I suspect this is going on all the time, people within companies can’t be bothered to look for better arrangements, and happily sign off on bad deals because its not their money being spent.  They can hide behind the idea that this is a trusted vendor if it ever comes back on them that they overpaid.  A structure where they have greater investment in getting the best bang for the companies buck is clearly a good thing.

I’ve thought that an interesting approach to running a medium or large size company would be to model its structure on the free market.  Each group would provide services to the rest of the company and charge them what the (internal) market would bear.  If one group start gouging the rest of the company, competition could start offering the same service and bring them back into line.  So groups could choose who they wanted to manage payroll for them, work out a service contract with them, and if they were unhappy with the price or service, switch to a competitor (or handle payroll themselves).

Company profits could be used as the currency within the company.  If someone leading a group was able to deliver superior results with less resources, the excess would be hers to take home as a bonus.  If someone runs an inefficient team, they will make less than their leaner competitors.  At each level individuals will have a personal incentive to deliver the best results for the lowest cost.  It could be something like at the end of the year, they get a bonus of 10% of the company profits they’ve “accumulated”.

Each group could be given resources and complete discretion over who they hire and where they spend their money (they can buy new computers, but that leaves less resources to increase salaries or take home as a bonus).  This allows entrepreneurs to flourish within the company.

The biggest problem is that people will obviously game the system (whatever the rules are, they’ll operate to try to maximize their personal benefit within them).  The beauty of the free market is it leads to people being of service to society in order to personally benefit.  The flow of currency through the company therefore should be as closely tied to the business practices as possible (such that “gaming the system” will lead to higher profits for the company).

Perhaps salesman will be given credit based on the gross sales they make.  They need to actually purchase what they sell from the manufacturing department (who, in turn, buys from R&D).  Groups are free to make whatever deals will make the system as a whole work (perhaps giving a certain salesman exclusive access to a product in exchange for a guaranteed order size or whatever).

People within the company will be held accountable as well, where if there’s a product defect or a legal problem, the cost of that lands on the department that’s responsible (perhaps destroying their bonuses for the year or leading to their group being dissolved).

It would be trivial to “spin off” a part of the company that might offer valuable service to other companies and individuals (just make them autonomous and keep doing business with them).  Equally, acquired companies could keep doing business the way they always had, and continue interacting with the rest of the company.

The people at the top would be mainly focused on enforcing contracts between the groups, and providing the general rules for interactions between them (which should be kept as simple as possible, any ideas to create new and convoluted interactions, rules or requirements should be avoided).  At the end of the year, the 90% of profits goes to the owner(s) or shareholders.  They would count on the increased efficiency of everyone in the company continually looking for better ways to do business would make the 90% worth more than 100% of a totalitarian company.

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Pricing

A big challenge for anyone running their own business is determining the right price to charge.

There are all sorts of ideas that claim to give you the right price (such as the idealized “supply and demand” curve from economics), and all sorts of wacky exceptions (such as loss leaders at the grocery store).

Many technical people fall into a trap when they get into business.  An elderly professor I know who had tried to run his own business found this was the core of what limited his success.  Even after he warned me about it, I went and did the same thing when I started my business.

Techies seem to gravitate to the idea that the right way to price products or services is to add up the cost, add a reasonable profit margin on this, then sell it for that price.  If, after labour, materials and everything, widgets cost you $30 to make, selling them for $42 (a 40% markup) is clearly the answer.

The joke is, a widget might not be worth $42 to the buyer.  It may be worth $20 (in which case you’re a fool to make them), or $400 (in which case you’re a fool to sell them for $42).  The right price to charge for something is the highest price customers are willing to pay.

Commodities are the exception to this, as they get driven down to the price to bring them to market plus a small markup.  There’s no real difference between brands of salt, so manufacturers will keep undercutting each other until the price gets to the “techie ideal” of cost + markup.

Kenny Kramer (the real life basis for Cosmo Kramer) sold electronic jewelry during the disco years.  He was able to get them manufactured dirt cheap, then sell them for a super-high markup.  This allowed him to not work for a years, long after disco was dead (will disco ever REALLY be dead though?).

Guiness416 recently pointed us towards a great article about gourmet chocolate.  The punch line is they buy chocolate that’s available to anyone and sell it in smaller chunks for a 1,300% markup. I was horrified reading it, and it just seemed so scummy to me.  It’s probably good business.  People with too much money want to find something they feel is extra-special, and are delighted to pay an outrageous price for it (given that the company is still in business years after the article was published).  They aren’t selling chocolate.  They’re selling gifts that say to the recipient “this cost a lot of money”.

Everyone has heard that the fountain drinks you buy at the movie theater for $4 costs them $0.10 to provide.  Is a 4000% markup reasonable?  Is it reasonable if it subsidizes other parts of the theater experience?

Long time readers know Mike and I would never say a bad word about real estate agents.  However, a case recently came up in Australia where a real estate agent bought a house worth $300k, from a man in a retirement home, for $150k (good thing they have a duty to their clients, eh?).  In this case I think its clearly wrong because the seller had a diminished capacity and the agent took advantage of that.  The same thing happened to my grandfather:  a real estate agent bought a parcel of land off of him for $5k, then resold it 6 months later for $10k.  This was 40 or 50 years ago, so it was a significant amount of money at the time.  Heck, it even landed the agent in the Cheap clan’s “Big Book of Grudges”.

I find it hard to shake the feeling that this isn’t right (I sure wouldn’t be comfortable taking advantage of someone like that), but all evidence seems to tell me that I’ve got the wrong outlook on this issue.  Or at least I don’t have the right outlook if I want to be successful in business.

Is it wrong to charge far, far more for something than it cost you?  What are the limits to “looking out for your own interests” and at what point does it become unethical gouging?

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Happy Labour Day

If you’ve got the day off, enjoy the break!  If you’re working, our sympathies.

Mike & Mr. Cheap

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Giant Book Giveaway Results!

Ok, the contest closed at 8:00 pm est and I decided to just go ahead and announce the winners tonight:

  1. Brandon
  2. Jeff Nachtigall
  3. William
  4. Plamen
  5. Paul (email)
  6. Regular
  7. David

I picked numbers at random and whoever had a comment with the same number was the winner.  I’ve sent emails to all the winners asking for their preferences and will publish the order in which the books were chosen since I know I’m curious.

In fact, I’m even going to predict that the books go in the order of that they were listed in the contest:

  1. Four Pillars
  2. Real Estate Investing
  3. Value Investing
  4. Quiet Millionaire
  5. Send Money

Congrats to all the winners!

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Friday Linkstuff

Squawkfox wrote an absolute fantastic post on surrounding yourself with excellence.  Whether you are trying to exercise, diet, save money or anything else – hanging out with the right people will help you achieve your goals.

Money Grubbing Lawyer (a very good new blog) wrote an entertaining post on the possibilities of going bankrupt and whether his life would have been better off if he had done that in the past.   Read the post and subscribe to his feed.

Thanks to Guiness416 who told us about this great story of a company that makes a lot of money from selling normal chocolate by pretending it is gold.  It’s a long one but worth the read.

Money Ning says that perceptions can change how we think about prices.  Having a good memory can also help in this situation – just because something (ie a house) is cheaper than it was 6 months ago doesn’t mean its cheap!).

Canadian Capitalist wrote a post commenting on a study written by a mutual fund analyst that apparently proves that index funds are not perfect. Which is silly because they are!

The Financial Blogger talks about how much hard work it is to earn passive income.  🙂

Canadian Dream has an idea about paying people according to their value to society. Sorry, but supply and demand determines salaries.

Canadian Dream also wrote about how the equity and real estate markets are wreaking havoc with his net worth goals.  I hate to say I told you so…but I told you so! 🙂  If you want to set goals then pick things that you have a fair bit of control over.  Net worth is not one of those things (unless you don’t have any assets).

Million Dollar Journey wrote about how indexing might not be for you.  Needless to say, this post generated a bit of controversy (or what passes for controversy in the blogosphere). 🙂

Michael James says that pennies are not worth the time. I agree!

Where Does All My Money Go did some analysis on whether a “buy and hold” investment strategy is the best way to go.

Blunt Money is adding insulation to her attic and is curious as to how much money she will save on utility bills.

Cleverdude’s wife got a ticket for going through a red light but he isn’t going to fight it.

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Giant Book Giveaway!

Please note that the contest is closed!

It’s been a while since we’ve done a book giveaway on this blog – too long! Between Mr. Cheap and I, we’ve managed to collect quite a few books. Some of them might be more suitable for presents but they are all worth a read (by someone). 🙂

Rules

Although we would love everyone to link to us, write a post about the contest, wash my car in order to enter the contest – you don’t have to. All you have to do is enter a comment or send an email to qffpillars at gmail dot com and you are in. I’d very much prefer that you enter a comment rather than use the email option.

The contest will end this Friday, August 29 at 8:00pm.

The books

The Four Pillars of Investing by William Bernstein. One of our favourite readers and commenters Nicolas has graciously donated a copy of this book which is my favourite.

Retire Rich From Real Estate by Marc W. Andersen. I thought this was a pretty good book for learning about real estate investing although Mr. Cheap wasn’t as impressed although he said it is a good book for beginners.

The Little Book of Value Investing by Christopher Browne. This book is great for value and dividend investors – if you are feeling down about your portfolios then this book might be a good pick-me-up!  We posted a review here.

The Quiet Millionaire by Brett Wilder. This is a general personal finance book.

Please Send Money – Dara Duguay. This book is aimed at younger adults who don’t have much financial knowledge.

How it will work

I will pick seven people at random (there are 2 copies of the real estate book and Send Money) and will email them in order.  The winners will get to choose which book they want out of the remaining books.

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Thursday Linkstuff and Rob Carrick is God

First off – Mr. Cheap and I were thrilled to be mentioned in last weeks Globe and Mail column written by none other than Canada’s (and quite possibly the world’s) pre-eminent #1 personal finance journalist Rob Carrick! He mentioned our blog along with Canadian Capitalist and Million Dollar Journey as worthwhile personal finance reads which made us feel pretty good! The main point of the article was to talk about real estate blog resources and it centered on Canadian Mortgage Trends which I read and enjoy quite a bit.

Some recent posts from the blogosphere….

Squawkfox published a sexy, frugalicious ebook called “Get fab without spending a fortune“. You have to sign up for her feed in order to get the book but it is worth it for the photos alone!

Million Dollar Journey had a good post about debt – good?, bad?, indifferent? Read on…. If you liked that post then you might also be interested in a Squawkfox post about debt where she took the liberty of removing all uncertainties – “Why good debt is a lie“.

Moolanomy bought a Nespresso machine – from the photo it looks like a beautiful thing but it also costs money!

Where there is a will, there is a way

As part of our group project, Canadian Capitalist says to “Get your wills done through a lawyer“. Don’t cheap out with the home will kit, the drunken post-it note on the fridge “I leave everything to the one I luv” or even the Lionel Hutz type lawyer. Spend the money ($300-$400) and do it right!!

Where Does All My Money Go let us know about the benefits of a professional executor. This sounds like a pretty good service, especially if you don’t have anyone in mind to look after your estate.

The Financial Blogger came up with some common estate planning mistakes. Very good post and quite possibly one of the funniest lines I read all week – he talks about a situation that screws the second child – “I can tell you that your second child will surely kick your tomb if it ever happens!“. 🙂

Thicken My Wallet wrote about “5 common myths about wills“. This is free advice from a lawyer so check it out!

Million Dollar Journey explains why you need a will and the basics of estate planning. Good stuff MDJ but apparently he is a bit behind in his own will project so hopefully he will get it done soon and write about it!

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Friday Linkstuff – lots and lots and lots o’ links!

This post started out as a simple PFN roundup and well…

Frugal Dad, who I recently mentioned for posting a great hockey fight pic, is dealing with a very difficult family situation so keep him and his family in your thoughts.

Begin at the Beginning by Remodel This Life was my favourite post of the week. It deals with how hard it is to get things done (and started) and was written in such a nice way. I think I’m going to start putting pictures of flowers into my posts. 🙂

Brip Blap wrote about night guy and morning guy – as a night owl who has to get up early in the morning – this post hit home.

David from Money Ning started a new blog called Busy Blogging Dot Com– it is about the business of blogging and I recommend it highly if you are interested in a behind-the-scenes look at blogging – I’ve read every post so far (it’s pretty new) and I’m really enjoying it.

Finance Freelance Life started also started a blogging blog but it is more slanted to the technical side. I really love it so far because she can explain things in a way that is understandable and complete. Definitely worth a read. Finance Freelance Life also offers blog consulting services – in other words for extremely reasonable amounts of money she will do technical changes to your blog as well as give advice about things like blog presentation, ad layout etc. I haven’t hired her yet but I probably will at some point – she really is quite good.

This extremely short post from My Two Dollars sums up my feelings about bottled water perfectly.

Squawkfox wrote another great food post with awesome, mouth-watering, drool-inducing photos in a piece entitled 5 Cheap, Easy, and Healthy Family Dinners for $5. We are going to try some of these!

In response to Mr. Cheap’s post on MLM – Monetary Maladies wrote a letter of her own to her parents and all I can say is WOW! Nothing to do with PF but it is an interesting read.

Cheap Healthy Good did a brilliant and funny post about the Simpsons and good eating – I love the Simpsons so if you do too then check it out.

Money Ning has too much money on his hands and wanted some input as to whether he should buy an investment property.

The Personal Financier asks – would you be willing to pay 60% income tax for a higher level of social equality? Good questions for Canadians since we are pretty socialist already – would you be willing to go further? (another great blog)

Madison from My Dollar Plan quit her job and will be a pro-blogger, stay-at-home-mom and part-time construction supervisor (great photo). Congrats!

Million Dollar Journey had a very informative post on stock margin and how it works.

The Wisdom Journal has some suggestions for how to wreck your retirement. He also had a funny post on warning signs that your bank is about to fail. My fave was #11 – “Toasters? Out. Valet parking? In. Oddly enough, there’s a used car lot just next door…“.

The Financial Blogger had a great series on estate planning – it is in 5 parts and worth the read.

Where Does All My Money Go had a post on diworsification – don’t know what that means? Then read the post!

Blunt Money gives 9 good reasons not to buy a stock. The first one is “because you like the name of the company”. 🙂

Amateur Asset Allocator had an excellent review of William Bernstein’s “The Intelligent Asset Allocator“.

Michael James wants to know why are financial advisors are paid from commissions? (excellent blog by the way)

Clever Dude wants to sell his big bad truck because he doesn’t need it and it is costing him a lot of money. Only problem is that he is so in love with said truck that he can’t let it go. Now he is finding that used truck prices are dropping.

For anyone out there who is obsessed with savings for their kids education at all costs – you might want to read why you shouldn’t pay for your child’s college education.

Money Ning talks about up-selling and how it can affect your budget. I always find posts about negotiations interesting – buying a car, house etc and learning about sales tactics (even in a restaurant) is the best way to be able to resist ordering more food/booze than you need.

We entered our first carnival of personal finance in ages which was hosted at Squawkfox!