Can Cryptocurrency be Centralized by Banks

1 Summary of “Which Competitive Advantage(s)? Competitive Advantage–Market Performance Relationships in International Markets”

Introduction

Kaleka and Morgan (2017) conducted a study to evaluate the elements of competitive advantage among exporters in the UK. Specifically, they looked at the factors that affect competitive advantage and which types of competitive advantage yield the best results. The authors focused on price, product and service quality in relation to performance among international firms. The framework for analysis included how customer value logic affects value creation and value capture. This paper describes the objectives of the study, the methodology used, and the findings.

Objectives

The main objective of the study by Kaleka and Morgan (2017) was to fill a gap in the research on competitive advantage resulting from a lack of focus on the types of competitive advantage that affect performance outcomes and the contingency factors that play a part in determining these outcomes. The researchers began by asking two questions upfront: “When does competitive advantage lead to superior performance in export markets? How can exporters best capture the value they create?” (Kaleka & Morgan, 2017, p. 25). They showed that existing models of firm performance are inadequate for answering these questions because they offer only “a broad picture of the antecedents of market performance” (Kaleka & Morgan, 2017, p. 25). For that reason, a number of assumptions about the relationship between performance and advantage are routinely left unexplored by researchers. Kaleka and Morgan (2017) aimed to investigate those assumptions. The two questions they used to guide their study were: (1) Which types of competitive advantage lead to superior export market performance? (2) What contingencies may affect these relationships?

After reviewing the relevant literature on competitive advantage, value capture, and market performance, the authors noted that their study sought to add to the current body of literature by advancing “a detailed framework connecting the literature streams on competitive advantage and value creation and appropriation” (Kaleka & Morgan, 2017, p. 27). Secondly, the authors aimed to contribute to current literature by highlighting “the role of symmetries and asymmetries in achievement of” competitive advantage while simultaneously drawing attention to “the market performance effect of symmetric and asymmetric combinations of pairings of price, product, and service advantage” (Kaleka & Morgan, 2017, p. 27). Thirdly, the study aimed to contribute to existing literature by identifying “the roles of a set of relevant firm-controlled and external environmental factors in transforming price, product, and service advantages into exporter performance in international markets” (Kaleka & Morgan, 2017, p. 27).

Methodology

To provide a framework for the study, the authors focused on value and the ways in which consumers perceive it. As value creation is one of the main goals of a business, it stands to reason that value is an important metric that should be understood from the perspective of the consumer. Customer value logic was thus at the heart of the authors’ framework, for, as they explained, “the key stage in [the] process of value creation and capture is when customers develop perceptions of the value of the firm’s offering, as they explicitly or intuitively compare its offering with those of competitors” (Kaleka & Morgan, 2017, p. 27). To define the process of value creation and capture for firms and customers, the authors created a figure that expresses the process visually. That process begins with a firm developing a value offering and marketing it. Customers then develop perceptions of that value offering and compare it to other options in the market. At this point, the business’s positional competitive advantage is established. Customers then offer money in exchange for value offering and the firm captures value from the exchange, while customers do as well because of the use they obtain from the firm’s value offering. The business then focuses on even more ways to create more value offerings.

The theory of the authors is that “environmental factors affect the transformation of positional advantage to actual sales and market share in the overseas markets through influencing customer needs and purchasing power” (Kaleka & Morgan, 2017, p. 28). They hypothesize that “contingencies render the firm’s extraction of financial rents ambiguous and, in doing so, contribute to weaknesses in viewing competitive advantage as a sustainable strategic goal” (Kaleka & Morgan, 2017, p. 28). In other words, if firms do not understand how contingency factors affect value capture, they cannot maximize their ability to create greater value offerings.

With that framework, theory and hypothesis in place, the authors situated their study within the context of exporters in the UK durable goods industry. These were companies that sold goods through local retailers overseas. Both distributors and end-user customers were included in the study as customers.

The main assumption targeted in the study is the assumption that there is a “direct positive relationship between competitive advantage and market performance” (Kaleka & Morgan, 2017, p. 28). Because this assumption affects model-building and is rarely tested, the authors believed it was important to assess whether “more specific competitive advantage–performance mechanisms [were] discernible at a lower level of aggregation” (Kaleka & Morgan, 2017, p. 28).

To test this assumption, the authors randomly selected 887 companies from the Dun and Bradstreet Directory of UK exporting manufacturers from a cross-section of different industries. Surveys were mailed to these selected companies and 312 responses were returned, representing a 35.25% response rate. 30.2% of the sample were in the machinery (except electrical) industry; 25.9% were in the electrical and electronic machinery, equipment, and supplies industries; 14.6% were in the chemical and allied products; 12.9% were in the apparel and fabrics industries; 12% were from the rubber and plastics industries; and 4.3% were from the textile mills industry. The survey was directed to the executives of these companies. The executives were asked to select a single venture with which they were most familiar and to use that venture when answering the survey. In total 268 ventures were identified. Of these ventures, nearly half of them were ventures in the EU; 15% of them were in North America; less than 3% of them were in Japan; less than 5% of them were in other developed nations; less than 4% of them were in former Soviet Bloc states; slightly more than 15% of them were in developing countries; and slightly more than 8% of them were in recently industrialized nations.

Based on anecdotal evidence, the authors concluded that competitive advantage is a subjective construct that often means different things to different people. Therefore, to measure competitive advantage, the authors relied on measurements of three specific dimensions—price, product and service advantage.

For price advantage, those surveyed were asked to compare their value offerings with competitors in terms of cost of goods sold and selling price to end-users.

For product advantage, those surveyed were asked to compare their value offerings with competitors in terms of product quality, design, and packaging.

For service advantage, those surveyed were asked to compare their value offerings with competitors in terms of “product accessibility,” “technical support and after-sales service,” and “delivery speed and reliability” while providing a reflective rating in terms of “overall service quality” and “overall satisfaction with the service offering” (Kaleka & Morgan, 2017, p. 33).

Those surveyed also provided data on “sales volume,” “market share,” and “revenue from products introduced during the past three years” in comparison with their main competitors in the specific market (Kaleka & Morgan, 2017, p. 33).

The researchers confirmed through assessment of scale reliability and validity tests that common method bias was not an issue of concern in the study. The researchers conducted regression analysis to statistically evaluate the results of the surveys.

Conclusion and Findings

The findings showed that very nearly every firm that took part in the survey believed itself to have competitive advantage in terms of product and service advantage but that when it came to price advantage the firms viewed themselves as having only a marginal advantage when compared to competitors. The ventures that the firms chose to select when providing responses tended to be high-performing ventures. After conducting regression analysis, the researchers found that “only price and service advantage paths to market performance were significant” (Kaleka & Morgan, 2017, p. 34). The researchers thus concluded that the findings were consistent with their theory and that “achieving competitive advantage is far from sufficient to guarantee an exporting firm an increase in sales” (Kaleka & Morgan, 2017, p. 34).

Additionally, the researchers found that performance is influenced more when one competitive advantage is more developed than another. By focusing the business on developing one specific competitive advantage, the business tended to perform better. At the same time, the researchers concluded that “asymmetric achievement of product–service advantage has a more positive effect on market performance when the asymmetry errs toward service advantage” (Kaleka & Morgan, 2017, p. 35). Overall, the researchers drew two important conclusions from the findings: one being that avoiding placing emphasis solely on product advantage and complementing it in a balanced way with service advantage seems to be a recipe to strong market performance; the other being that achievement of a clear service advantage contributes to satisfactory performance, but an unbalanced combination of product and service advantage has a negative effect on performance (Kaleka & Morgan, 2017, p. 38).

The findings show that overseas customers want a high-quality service at a low-cost price and that if a company can satisfy this demand, the firm will perform very well in its industry. Nonetheless, the researchers also offered this caveat: “there is no indication that a product perceived as high quality will necessarily sell—on its own or under various contingencies” (Kaleka & Morgan, 2017, p. 38). For this reason, the researchers believed themselves to be justified in their framework, which highlighted the importance of the act of exchange and points to an array of factors potentially affecting the relationship between the variables. Price advantage is not to be underestimated in overseas markets when it comes to value creation and capture.

There is thus a need to update models of quality and satisfaction in industries. Companies place a great deal of emphasis on product advantage, but that contributor alone does not necessarily lead to better competitive advantage or to greater market performance. The main take-away from the study is that positive customer perceptions do not always translate into sales and superior market performance. There is some nuance and discretion needed when applying a model, particularly with respect to the service component of a value offering. Service should be just as important if not more important in the competitive advantage concept as product advantage. However, it infrequently ranks as a top consideration among executives. Emphasizing service quality could improve distributorship overall, according to the researchers.

The researchers do note the limitations of their study, particularly the use of cross-sectional data, self-reported data and the sample, which consisted entirely of UK firms. The nuances of understanding competitive advantage might be more deeply understood if a single case study approach were to be used. The researchers note that more understanding is needed of the relationships between price, product and service advantage. Every customer and industry and overseas market is likely to have more variables that should be considered when developing a model to help executives form a competitive strategy. The building blocks for such a model may be found in the findings and conclusions of this study, but more precise focus should be undertaken in future research so as to clarify and deepen this understanding. All told, the study is helpful for drawing attention to a much ignored assumption of relationships when it comes to developing competitive advantage strategies. However, the study does show that this understanding can be achieved through statistical analysis. At the same time, closer scrutiny is needed to shed increased light on various industries and how superior market performance can be obtained.

References

Kaleka, A., & Morgan, N. A. (2017). Which competitive advantage (s)? Competitive

advantage–market performance relationships in international markets. Journal of International Marketing, 25(4), 25-49.

2 Summary Harwick

Introduction

Harwick (2016) discusses the plausible claim that Bitcoin or cryptocurrency in general could supplant the international monetary system as it exists today. The justification for this claim is that distributed technologies are on the rise, and as there is no central issuer (i.e., central bank) involved in the creation of cryptocurrency it is a unique alternative to fiat currency, which can be created essentially at the click of a button to dilute the value of existing fiat currency. Harwick (2016) begins his study by first defining cryptocurrency, then discussing its monetary value; then he compares it to gold, which has for thousands of years been seen as the standard store of value around the world; then the author discusses technical hurdles to its mainstream adoption, as well as institutional hurdles. Finally, the author discusses alternatives to intermediation, and discusses whether decentral banking is a plausible outcome.

Objectives

The main objective of Harwick (2016) in his study is to assess “the institutional prerequisites of purchasing-power stability, economic efficiency, and sustained economic growth—namely, a market for financial intermediation” (p. 569). To achieve this objective, the author has to go through a series of steps to provide background on cryptocurrency, what it is, what utility it affords as a currency, and how it might reach mainstream adoption considering regulatory issues that serve as hurdles to such adoption. The main issue with Bitcoin is not that it suffers from price instability but rather that it lacks financial intermediaries and thus is dependent upon other currencies, such as the dollar.

The other objective of Harwick (2016) is to describe the main hurdle to cryptocurrency’s mainstream adoption. That hurdle is identified as a lack of “stabilizing financial institutions around cryptocurrency ecosystems” (p. 586). Harwick’s aim is thus not to establish why cryptocurrency has been adopted by some as a justifiable alternative to fiat currency. Rather it is to show that the current financial system cannot accept cryptocurrency into its schematics, and the financial system has far more leverage the world over than does the cryptocurrency regime. Harwick does not set out to debunk cryptocurrency or to praise it as a solution to current monetary and fiscal problems. However, he does set out to examine its limitations and what sort of technological and institutional solutions would be needed to increase its potential for mainstream adoption in the international financial system. The problem that he seeks to address is that mainstream adoption of cryptocurrency places necessary hurdles in front of cryptocurrency, which to overcome would require that the nature of cryptocurrency change substantially so as to render it just another currency that could be manipulated or forged. This would of course cause it to lose its value and utility among early adopters and those who are anti-fiat currency. The author aims to see whether a plausible solution is possible.

Methodology

The author does not disclose a particular methodology, as the article is not quantitative in design, but is rather a qualitative assessment of the subject based on the expert opinion of the author. The author cites a few seminal works to support his claims throughout, such as Hayek, but there is no hypothesis made, no sample, no testing or experimentation. Thus, there is no methodology to speak of. However, there is a method employed by Harwick (2016) in terms of defending his thesis and it begins with the definition of his subject. He defines cryptocurrency as a method—to be precise, a “method of constituting virtual ‘coins’ and providing for their secure ownership and transaction using a cryptographic problem” (Harwick, 2016, p. 570). Transactions are unique and verifiable, which lends the method its trustworthiness. Cryptocurrency is mined, typically through the use of a hash target, and a coin is awarded once a certain number of block transactions have been assembled. Electricity is required to mine coins and the transactions are part of a blockchain that is held by every computer on the cryptocurrency network.

Account owners are private, which ensures anonymity even though transactions are public. The more widespread the cryptocurrency is, like Bitcoin, the harder it is for the blockchain to be hacked. Forging a transaction is said to be impossible because it would require more computing power than all the nodes together in that blockchain. Bitcoin’s appeal is based on the trust that people have for its developer, who is relatively unknown.

The next step in Harwick’s methodology is to answer the question as to why cryptocurrency might be regarded as money. Here Harwick leans upon Mises for a definition of moneyness, i.e., the extent to which “a particular commodity gradually overcomes network hurdles and becomes accepted as money by virtue of its increasing liquidity” (pp. 572-3). In short, Harwick argues that a thing has moneyness so long as people use it as money. Cryptocurrencies have moneyness because they are portable, have durability, are capable of being divided, and have security. However, cryptocurrency lacks the character of liquidity, as it cannot be spent at places such as convenience stores. They also lack a stability of value. Demand for Bitcoin, which makes up the overwhelming majority of the cryptocurrency market, is volatile. Speculation drives the price of Bitcoin up and down. It is a speculative cryptocurrency and little more at this day and time.

Harwick then compares cryptocurrency to gold and asks why gold was accepted as money. The answer is that gold served the purpose of the global money supply, as metal coins were the mainstream medium of exchange. Economies did not see substantial growth like they do today. However, financial innovations succeeded in removing gold from the monetary scheme worldwide. That is why notes like the Federal Reserve Note came into existence. It was easier for financial institutions worldwide to accept a paper credit scheme, which ushered in the era of fiat currency. It is as a rival to the fiat currency scheme that cryptocurrency has gained appeal, particularly in recent years, among speculators, who see the fiat system as problematic to maintaining a store of value.

Although Harwick defined cryptocurrency as a method, he next transitions to explaining the difference between a currency and a method of exchange. Along with electronic payments, the rise of fractional reserve banking altered the way in which markets transitioned from metal coins to the use of bank liabilities as a method of exchange. At first, bank notes were backed by gold—but then they were not—and few protested because they were used to accepting bank notes, and did not think about their actual value. Buyers of gold have continued to argue that bank notes are inflationary and that gold is the only real store of value, based on history.

Conclusions and Findings

In order for cryptocurrency to obtain mainstream adoption, the issue of trust must be resolved, but also the exchange of one method for another must take place at the institutional level, according to the author. Technological innovations have brought into the range of possibility a hybrid state of exchange between liabilities and cryptocurrencies: this is evident in the field of Open Transactions (OT), which “already facilitates secure cross-blockchain exchange of different cryptocurrencies. If the issuer’s protocol can be administered on a blockchain, OT can provide a framework for the relatively transparent use of multiple inside monies and base monies and even the issue of liabilities backed by and denominated in a basket of cryptocurrencies” (p. 579). This type of system is already in place with credit cards, which allow users of various credit accounts to exchange with merchants. Adding cryptocurrency to this system should not be difficult. The problem is not the technical aspect of the situation. The problem is that cryptocurrency has a decentralizing aspect to it that runs counter intuitively to what the financial system the world over has erected. The financial institutions are deeply entrenched in a centralized system. Cryptocurrency decentralizes the exchange process and democratizes it. It essentially eliminates the need for a central bank to oversee the process. On the face of it, this does not present a problem—but once cryptocurrency becomes a mainstream player as a medium of exchange, the risk of protocol fraud rises exponentially. The greater its adoption, the greater the likelihood of blockchain fraudulence. Cryptocurrency will not be trusted by financial institutions for so long as it remains decentralized—but decentralization is the main source of its appeal for speculators and investors and critics of fiat currency. A centralized cryptocurrency would essentially be useless for those who advocate for a decentralized monetary system. Moreover, the advantages of a decentralized network would be lost in a centralized exchange scheme, as the author notes: “the protocol’s security lies in the assumption that an attacker will never be able to outwork all the honest computers on the network. The use of bank liabilities as media of exchange has the effect of taking people off the original network and putting them on the bank’s own services. If the majority of computing power on the base currency’s protocol comes to be controlled by a few banks, the generation of a fraudulent blockchain would require only the hijacking of the servers of a few major intermediaries or collusion among them” (p. 580). Not only is this a fear, but so too is the fear that institutional monopoly on the part of financial institutions could lead to malevolent regulation and the control of the blockchain by leading banks, which could then manipulate the currency. Thus, the attractiveness of blockchain and cryptocurrency is that it provides a secure format for exchange for people who want to exchange without the financial institutions acting as intermediaries. Should cryptocurrency ever become mainstream, its attractiveness will necessarily diminish as a cost of doing business in the international system of currency exchange.

Harwick does point out that there are alternatives to intermediation. One example the author provides is that “linking the proliferation of coins to some macroeconomic variable—for example unemployment or an exchange rate—like a central bank might” be a possibility (p. 581). Yet this does not necessarily provide the solution that is needed, for as the author points out, “intermediation ensures a relatively quick diffusion of new money through the economy; otherwise, we are left with the transmission mechanism of the idiosyncratic spending habits of the miners to whom the new money goes as a reward” (p. 583). Providing stability is one of the main features of centralization, but since cryptocurrency appeals to users because of its decentralization, the problem of how to achieve mainstream adoption remains. Cryptocurrencies lack credit institutions; therefore, “creative solutions to the volatility problem that do not address the institutional hindrances to ad hoc credit creation will not allow them to sustain economic growth without relying on markets denominated in other currencies” (p. 585).

Thus, the main hurdle in cryptocurrency adoption is the institutional hurdle that the financial system has put in place: “In addition to the intrinsic network hurdles, regulatory uncertainty and hostility also constitute an extrinsic hurdle for intermediation in a way that they do not for the protocols themselves” (p. 579). Crytpocurrency serves a purpose in the process of exchange today by providing users with an alternative to fiat currency. It appeals to speculators because of its volatility; prices can rise and fall quickly, and rapid gains and losses can be seen. Should cryptocurrency become a reserve currency, its nature would change to such an extent that its utility for critics of fiat currency and the international financial regulatory scheme of today would be lost. Cryptocurrency thus has appeal as a marginal medium of exchange; as a store of value, its utility is questionable. As a potential reserve currency, its future is not promising. Overall, the author concludes that a plausible solution to the problem of making cryptocurrency mainstream is elusive. Without institutional adoption, cryptocurrency will not become a mainstream source of legal tender. With institutional adoption, cryptocurrency would necessarily give up the decentralized character that it currently enjoys.

References

Harwick, C. (2016). Cryptocurrency and the problem of intermediation. The Independent

Review, 20(4), 569-588.

3 Critical Report on IKEA

Introduction

Growth is the main objective of IKEA, as its Chief Sustainability Officer (CSO) has pointed out; if a company is not growing, it is dying. Thus, growth is the top priority of IKEA, according to the report by Rangan, Toffel, Dessain and Lenhardt (2014). However, IKEA also has sustainability objectives that it aims to meet. One of these aims is to balance out resources in emerging markets so as to meet growth targets. This report describes IKEA’s sustainability strategy and what it needs to do to meet its primary objectives of growth via sustainability. Currently, IKEA’s sustainable mission objective is to utilize sustainability “to drive innovation, transform our business, steer our investments and unleash new business opportunities” (People and Planet Positive, 2014, p. 7). Through sustainability, IKEA believes it can “strengthen our competitiveness by securing long-term access to important raw materials, maintain and develop our supplier base, deepen our relationships with co-workers and customers, and increase productivity. It will help us to lead change in society” (People and Planet Positive, 2014, p. 7). Sustainability is thus a key feature of IKEA’s growth strategy.

Sustainability Issues

IKEA launched its People and Planet Positive initiative in 2012. This initiative boasts that it uses green energy “equivalent to one third of our total energy consumption. We have currently installed around 550,000 photovoltaic panels on more than 100 stores and other buildings in nine countries, and we have 96 wind turbines in operation in seven countries. We have committed to own and operate wind turbines in ten countries” (People and Planet Positive, 2014). It is also committed to maintaining that “eighty-two per cent of the heat energy used by IKEA Industry Group comes from biomass” while working “to use less energy; and compared to 2010, the energy efficiency of our stores has improved by 8%, and our distribution centres by 9% (People and Planet Positive, 2014, p. 5). While these strategies are helpful, they do not address the core threat that could undermine IKEA’s sustainability strategy. The core threat is political instability on the global stage. IKEA has developed many positive relationships with nations in the emerging and developing world; however, economic sanctions, international regulations and retaliatory issues, as well as the looming specter of war could destabilize these relationships and cause IKEA to suffer significant set-backs towards achieving its growth objectives. In particularly, supply chain issues have caused headaches for IKEA, which would prefer to obtain wood materials from markets close to consumer markets to allay shipping costs.

IKEA’s wood supply chain issues are considerable in the light of its sustainability initiative. Sourcing wood in regions where workers’ rights are not protected by governments impairs its sustainability promise and also leads to deforestation which puts the livelihoods of people in developing worlds at risk while also potentially leading to climate change problems. The IWAY business principle, which is a principle the firm uses for Purchasing Products, Services and Materials, is based on the idea of making sure the following goals are met: no wood sourced from illegal harvesting, no wood sourced from operations where there are forest-related social conflicts; no wood sourced from high-conservation value forests unless they are responsibly managed.

IKEA’s Options

IKEA has several options to further its sustainability plans. One of these options is to outright own more forests. This would allow the firm to move away from supply chain dependence in regions where its sustainability mandate might be violated. It would also allow the firm to be vertically integrated. However, managing these forests could be capital-intensive. A lease on the land might also be problematic, as the lease might not be long enough to benefit from longer rotation years for wood species.

Another option is to drive higher procurement targets and standards. By implementing certified wood protocols, the cost of management would be offloaded to others and IKEA could benefit from the higher standards that certification regulations place on forest managers outside the company. Thus, setting a target to use wood that is certified by the FSC would help the company to meet its sustainability goals without having to invest dramatically on its own forests.

A third option is to cheapen its own materials by using more particleboard, i.e., engineered wood. By using more particleboard and less solid wood, IKEA could reduce the amount of global wood it uses. The problem is that it could lead to a problem in terms of value creation. Consumers perceive solid wood to be of a higher quality than particleboard (Rangan et al., 2014). If IKEA uses primarily particleboard it can be perceived by consumers as a cheapening of the product, which could lead to less value capture and poorer sales performance. IKEA will not grow if it loses sales, so there is a significant risk to using more particleboard in place of solid wood on products. If consumers do not approve of the shift, IKEA could stumble and its brand appeal could be damaged.