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What Your Company Can Learn From Global Economics

The Best Way to Financial Success Isn't Being Everything to Everyone

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According to the World Bank, America's per-capita gross-domestic product America is $49,965.

A thousand miles to the south is the country of Nicaragua where the per-capita GDP is just $4,072. Why does the average American enjoy an income that is more than 12 times one of its neighbors?

Most Americans probably agree with Barack Obama when he said to the United Nations: "I believe that America is exceptional." Its ability to "stand up for the interests of all" is special.

That might be true in the political world, but not in the economic one. But in reality, the general rule is the larger the population, the wealthier the country.

North America and South America
Take the nine countries on the North American continent. The three large-population countries (America, Mexico and Canada) have an average per-capita GDP of $36,410. The six small-population countries (Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama) have an average per-capita GDP of just $8,347.

In South America, the seven large-population countries (Brasil, Colombia, Argentina, Peru, Venezuela, Chile and Ecuador) have an average per-capita GDP of $13,004 while the five small-population countries (Bolivia, Paraguay, Uruguay, Guyana and Suriname) have a per-capita GDP of $7,942.

What creates wealth?
It's no secret. In his book "The Wealth of Nations" published in 1776, Adam Smith had the answer: "The division of labor leads to specialization, expertise, dexterity, and machinery, thereby producing greater wealth."

But there is a limit to specialization, as Adam Smith pointed out: "As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of the market."

In other words, the larger the market, the more specialization and the greater the wealth.

The smaller the market, the less specialization and the smaller the wealth.

Compare a big city with a small town. You won't find many rich people in a small town unless they moved there from a big city.

You will find many rich people in a big city because wealth is created by specialization. And specialization can only happen when the market is large enough.

Why are some small countries rich?
The per-capita GDP of Luxembourg, a country of just 537,000 people, is $91,388, more than 80% greater than the United States.

Qatar, with a population of just over 2 million, has a per-capita GDP of $83,460.

There are six countries wealthier than America and all of them are small-population countries. In addition to Luxembourg and Qatar, they include Norway, Singapore, Switzerland and Brunei. Total population of these six countries: 21.6 million. Less than the population of the state of Texas.

What makes a small country wealthy? Exports.

Here are the values of each country's exports as a percentage of the country's gross domestic product.

Luxembourg: 177%
Qatar: 70%
Norway: 41%
Singapore: 201%
Switzerland: 52%
Brunei: 81%

A small country cannot get wealthy by selling things to each other. A small country can only get wealthy by selling things to people in other countries.

What are America's exports as a percentage of gross domestic product? Just 14%.

Why are some big countries poor?
China is the largest-population country in the world with 1.4 billion people. India is second with 1.2 billion people. Together the two countries account for 36.8% of the world's population.

Yet both countries are relatively poor. China's per-capita GDP is $9,233 and India's is $3,876. Why is this so?

Adam Smith had the answer to this question, too: "The statesman who should attempt to direct private people in what manner they ought to employ their capitals . . . assume an authority which could safely be trusted to no council and senate whatever."

In the past, both China and India suffered from this exact problem, decades of government control of business. But relatively recently, both countries have adopted free-market principles. The result have been astounding.

China is perhaps the world's fastest-growing economy with average annual growth over the past decade of 10.5%. India's average annual growth over the past decade has been 7.7%. (Compare that to America's 1.7%.)

What makes a country wealthy is specialization. But do companies know this? I think not.

Few companies want to be specialists. They want to be generalists. They want to be a single source for a wide array of products and services.

Software companies are going hard
Computer software is by far the most dynamic industry in the world. Its growth has been absolutely staggering. You might think a company like Microsoft would be happy to specialize in computer software. But no.

As Steve Ballmer, former CEO, said recently: "The thing I regret is that we didn't put hardware and software together quicker."

Really? Will Microsoft's 2012 introduction of its Surface tablet computer and its 2013 acquisition of Nokia's phone business (for $7.2 billion) follow in the footsteps of its 2006 introduction of the Zune portable media player? History suggests that they will.

Over at Google, the same thinking is taking place. After its 2012 acquisition of Motorola Mobility for $12.5 billion, the company boasted: "Google is great at software; Motorola Mobility is great at devices. The combination of the two makes sense and will enable faster innovation."

Apparently it didn't make sense. Less than two years later, Google sold Motorola Mobility to Lenovo for $2.9 billion.

And just this year, Google spent $3.2 billion to purchase Nest Labs, maker of the Learning thermostat and the Protect smoke-and-carbon-monoxide detector. Apparently the long-term goal is to develop smart-home systems.

Another software company dipping its toes in hardware is Facebook with its $2 billion acquisition of Oculus VR, a virtual-reality company.

Hardware companies are going soft
In 2009, Dell bought Perot Data Systems for $3.9 billion and in 2012, it bought Quest Software for $2.4 billion.

Have these acquisitions helped Dell? Its revenues in fiscal 2013 (its last year as a public company) were $56.9 billion, less than the $57.4 billion recorded in fiscal 2007.

In 2005, Dell was the global leader in personal computers with a market share of 16.8%. Last year, Dell had fallen to third place with a market share of 11.6%.

Meanwhile over at Hewlett-Packard, the same scenario was taking place. In 2008, the company acquired Electronic Data Systems for $13 billion. In 2011, H-P acquired Autonomy for $11 billion.

Have these acquisitions helped H-P's bottom line. Net profits have declined from $8.7 billion in 2010 to $5.1 billion in 2013. (And, of course, there was the company's $12.7 billion loss in 2012.)

What makes a country wealthy is specialization. It seems strange that many companies don't practice this same idea.

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