But the trick is to figure out what is best when. Did Citigroup CEOs follow the best strategies?
1. Sanford Weill (empire building)
2. Chuck Prince (cleaned out legal and regulatory mess, inherited no doubt from 1.)
3. Vikram Pandit (reorganize unwieldy institution inherited from 1., clean up subprime mess inherited from 2.)
I'm thinking Citi is going to break up.
Story here. Here's my story (or a parable of capitalism, regulation, and why competition is inherently unstable).
I run a lawn mowing business and I start by canvassing many different neigborhoods for business. Soon I have some customers and begin mowing lawns. Then I find out that it would be more efficient if I have most of my customers in one neighborhood. My costs would be lower since I don't have to drive around as much. As an incentive, I offer those who can recommend me to their neighbors a discount on mowing if they can round up some neighbors. Soon I can focus on just a few neigborhoods. My costs are lower and my profits are higher even though I am charging less. I'm making up on volume what I'm losing on margins.
Business is good and I notice that some new entrants are trying to break into my territory. I go on a two pronged strategy: 1. I woo them to become my employees, promising them a steadier income. 2. I start buying up other lawn mowing companies to discourage competition as well as to grow into new neighborhoods.
Things work out well and soon I am mowing the lawns of local politicians. I treat them like a VIP by offering them lower prices on cuts but with additional teasers such as planting. My competitors become envious and attempt to introduce legislation that regulates the size of lawn mowing companies. My friendships with VIPs become useful and I try to persuade to vote against the legislation.
I point out that there are economies of scale in my kind of business and my growing big is good for the consumers because I pass the savings on to them. Meanwhile, my company is growing through aquistions and mountains of debt as I branch into landscaping and retailing (selling lawn mowers, shrubs, mulch, etc.). I contemplate going public.
Growth sputters and I start to raise prices to increase earnings. The company becomes unwieldy as I try to make all its parts move in sync. My attempts at stopping legislation are only partially successful. Different agencies start to look into my operations. My growth which has been exponential resulted some flaws in my bookkeeping. Legal costs mount as I try to meet new legislation requirements. While my landscaping business is doing okay, my retail operations are bleeding red ink. I start laying off people.
I hire new managers but it is too late. Retail operations are sold. Other lawn mowing divisions are divested to pay off debt. I'm soon back to mowing in a few neighborhoods.
1. All small companies want to grow.
2. The process of growth sows the seeds of its own destruction.
3. Stakeholders view growth enviously and try to undermine growth.
4. Competition is good as long as I was doing well, not otherwise.
5. And this is why capitalism is fragile. Economists would say that this is efficient.