The Bull & The Bear

MARKET BUZZ

BRIEFING BOARD

🔐 North Korean IT workers infiltrating tech companies rake in as much as $600 million annually for the regime. Hiring and paying the workers, even inadvertently, violates UN sanctions and is illegal in the US and in numerous other countries. These workers have been aggressively targeting crypto companies in particular. More than a dozen crypto companies have admitted to accidentally hiring workers from North Korea who used fake IDs, successfully navigated interviews, passed reference checks, and presented genuine work histories.

🤑 OpenAI has raised $6.6 billion in new funding, with investors valuing the startup at $157 billion. Investors in the round include Thrive Capital, Microsoft, SoftBank, and Nvidia. The startup was last valued at $86 billion early this year. Investors have the right to withdraw their money if OpenAI fails to convert to a for-profit company within two years.

👺 WordPress co-founder Matt Mullenweg last week came out with a harsh attack on major WordPress hosting provider WP Engine, calling the company a 'cancer' to the community. This has escalated into a barrage of legal threats that has caught many website operators in a conflict beyond their control. WP Engine customers were off from accessing WordPress.org's servers, but the company has been granted a temporary reprieve. WP Engine claims that Automattic demanded a very large sum of money days before Mullenweg's attack and threatened to carry out a 'scorched earth nuclear approach' toward WP Engine if the amount wasn't received. Many more details about the situation are available in the article.

📱 iOS 18 will allow users to select which contacts to share with an app instead of revealing their entire address book. Apple doesn't think the change will hurt developers, but some startups have seen contact sharing drop significantly since the iOS 18 change. The ability to quickly connect new users with friends can mean the difference between success and failure for apps. This change could mean friend-based social apps may eventually be replaced by apps like TikTok which show users content based on what they like rather than who they're connected to.

CORPORATE MISSTEPS

THE BIG BULL’S FALL: THE 1992 SCAM

Popularized by the famous web series Scam 1992, the financial scandal committed by Harshad Mehta was one of the largest in the history of India. The scam was about exploiting loopholes in India's banking system to channel the money into the stock market. Mehta and his friends found methods to suck away the bank's fund, inflate it, and then just manipulate the stock prices by pumping the funds. Harshad Mehta's childhood was relatively modest as he started by selling hosiery and cement. Energetic with a desire to do something big and an infatuation for the stock market, he soon landed a job as a broker at the Bombay Stock Exchange. By the 1980s, he had established his own company GrowMore Research and Asset Management. It was a meteoric rise in the stock market. He soon earned for himself the name "Big Bull" of Dalal Street, known for aggressive trading strategies.

The scam revolved around a major loophole in the banking system involving the forging of fake Bank receipts (BRs), which are the documents that record the financial transactions. Mehta started forging fake BRs and using non-existent securities as collateral to obtain loans from banks. This money received in form of loans was further diverted towards the stock market which further artificially inflated the prices of the share. This took place particularly in the blue-chip companies like SBI, Reliance, and ACC. As his reputation grew other, investors began following his lead and taking his advice.

However, the stunt was put an end to in April 1992, when the irregularities in the banking system came forth. On discovery of Mehta’s methods, the stock market crashed, erasing wealth and leading to panic. The scam, estimated to be around ₹4,000 crore, brought about a humongous liquidity crunch, mainly in the banking sectors. Mehta was soon arrested and charged with numerous financial crimes. The scandal led to widespread reforms in India's financial regulations. SEBI gained powers for regulating the stock market, besides just resorting to transparent measures. The Harshad Mehta scam remains an example that resonates with the dangers of greed while highlighting the relevance of strict control by the regulatory authorities to prevent the systems of finance from exploitation.

CASE IN POINT

BLACKBERRY’S BLACKOUT

Introduction:

BlackBerry Ltd is a Canadian company founded in 1984 by Mark Lazaridis and Douglas Fregin. Its rise to prominence was fuelled by its mobile phones, pagers and tablets that incorporated a unique QWERTY keyboard along with secure messaging capabilities making it a favourite amongst business professionals.

The Problem:

The advent and popular acceptance of smartphones demanded BlackBerry to adapt and innovate its devices such that they promote user-friendliness. BlackBerry’s refusal to adapt brought about its fall. The market continued to evolve following the introduction of iPhone in 2007. Its touchscreen interface and app ecosystem boasted user-friendliness while offering the customers something novel. Since iPhone offered a more palatable consumer expertise, higher hardware, and more apps to the consumers, it became an easy selection over the outdated BlackBerry.

Counter-Measures:

BlackBerry attempted to counter these threats with largely ineffective strategies. The company introduced touchscreen devices which struggled to gain traction. An attempt to bolster its app ecosystem through acquisitions and partnerships faced significant challenges in attracting developers. Additionally, the company's messaging platform, BBM, while popular, failed to gain widespread adoption outside of its core user base.

Decline:

All its unsuccessful countermeasures eventually led BlackBerry's market share to dwindle. The company faced declining revenues, layoffs, and a loss of investor confidence. These culminated in BlackBerry selling its handset business to a Canadian consortium in 2016 and shifting its primary focus to software and cybersecurity.

Additional Note:

Do watch ‘BlackBerry’, a biopic about the company directed by Matt Johnson, the offers further insights into what transpired within the company in an engaging and dramatic fashion that is available on Amazon Prime.

EXPERT EDGE

THE DOUBLE EDGED SWORD OF SCALE

Scaling a business is often viewed as a natural progression for companies aiming to expand their reach, grow revenue, and establish a larger presence in the market place. Scaling refers to the process of growing a business or organization in such a way that revenue increases without a disproportionate increase in costs. It involves expanding operations, production, and customer base while managing resources, infrastructure, and processes to support that growth. Understanding how these dynamics work is extremely important to entrepreneurs and managers seeking to get through the hassles of expansion effectively.

Benefits of Scale

Better unit economics: With a larger scale of production, each unit becomes cheaper because the fixed costs are shared amongst the products. Therefore, this means that the bigger company will be able to sell its products at a lower price compared to its smaller competitors, which enhances their position in the market.

Cost Reduction: Large organizations are in a better position to bargain with the suppliers and, hence, can secure more convenient rates, which reduces costs in general. It not only helps in raising profit margins, but also ensures the ability of competitive pricing strategies to attract more and more customers. 

Market Presence: Scaling enables a company to hold a better market position and raise the barriers to entry for potential entrants. This is often the only 'moat' that will be responsible for any long-term profitability and substantial share of the market held by the company.

Innovation Capacity: Large organizations can typically devote more to research and development to arrive at innovations that can give them additional competitive advantages.

Challenges of Scale

Operational Complexity: As the operations become complex, equally complicated management systems are required. The firms can have logistics and supply chain management issues related to business growth; these can result in increased costs and inefficiencies.

Reduced Control and Oversight: A larger workforce may imply a situation in which management can quickly lose oversight. The loss of oversight at that point may lead to variable quality of product or service delivery delays.

Communication Issues: The bigger an organization gets; the more complicated communication tends to get. Miscommunication creates inefficiency and misunderstandings amongst employees which could impact productivity and morale.

Cultural Dilution: Scaling too fast results in the dilution of the actual culture of the firm. Often, when culture has been diluted, employees become disengaged. Culture is an essential ingredient to foster and maintain employee satisfaction and retention as the growth takes place.

Conclusion
Business growth, therefore, is a journey of balancing benefits accruing from such growth with the challenges of the same. Economies of scale, on one hand, lower costs. Complications arising due to increased size, on the other hand, make leaders of businesses cautious and reconsider scaling their company. Scaling, therefore, needs to be cautiously planned and executed so that the associated benefits outweigh the challenges faced in this regard for sustainable growth of companies in an increasingly competitive environment.