The world is flat cover

Review: The World Is Flat: A Brief History of the Twenty-first Century by Thomas Friedman

February 6th, 2013

As technology continues to impact on the way companies do business, it has become increasingly important for investors to understand technological change and factor it into their investment choices. This book by Thomas Friedman, which describes his concept of a business world “flattened” by globalization, is interesting to us as students of Warren Buffett and value investing for several reasons:

  • Although Warren Buffett has said that he does not invest in technology stocks because he does not understand them, this does not mean that he avoids buying stock in businesses that use technology to improve their business plan.  For example, Berkshire Hathaway owns McLane Company whose business of providing supply chain solutions to businesses is based upon technology and communication systems.
  • Following from that, in an increasingly globalized world it is very difficult to understand any large company unless you understand the way globalization can affect its business model.
  • Finally, as a framework for understanding, we believe Friedman’s view of the “flattened world” and “triple convergence” provides a fascinating mental model for the investor that goes beyond balance sheets and annual reports - the sort of deep understanding advocated by Charlie Munger.

Friedman explains the flattening world: a world where changes in technology and communication have made the world not only smaller but flatter. Opportunities have been equalized, the advantages of being a business in the West have lessened, and work forces, suppliers and expertise have become international. Friedman identifies as factors in the flattening of the world ten “flattenners” and a “triple convergence”. His ten flattenners, which he explains and exemplifies, are:

  • The collapse of the Soviet Empire beginning in 1989
  • The emergence of Netscape
  • The beginnings of work flow software (for example, sales analysis and marketing tools)
  • Uploading
  • Outsourcing
  • Offshoring
  • The use of supply-chain systems
  • Insourcing
  • Getting information through web searching
  • The development of what he calls “steroids” which both use and assist the other flattenners. These steroids include growth in computing power and IT information exchange, VOIP and video conferencing, improvements in graphics, wireless technology.

The coming together of these flattenners was the first of what Friedman calls the Triple Convergence - three things that have changed the way companies do business. The other two are the development of business systems and methods to take advantage of technological change and the entry of billions of new people into the work force from countries that themselves are benefiting from the flattening world.

Even though Friedman develops other themes in this book, the flattenners and triple convergence form the basis for his examination of the new business world and discussion of specific businesses. One particular business in which Berkshire has invested is Walmart and Friedman shows how this company grew into the mammoth retailer that it is through using technology in stock management,  customer service and product marketing.

If you want to understand  why and how technology is important to any company that you are considering investing in, you should read this book.

This brings us back to our opening remarks - that although Warren Buffett has said that he will not buy into technology companies because he does not understand them, he does invest in companies that use technology to make their business successful. If we follow Buffett’s adage that you need to know the business of a company well before you invest in it, it follows that you need to understand the technology that it uses.

A further thought. It is becoming increasingly difficult to recognize what is a technology company and what is not. Amazon could perhaps be described as a technology company but we don’t think so. We think it is primarily a book shop that uses technology well to sell its products. What about Google? That is more difficult. On the one hand it is primarily a search engine business, i.e. a technology stock. On the other hand its income derives substantially from advertising. Is it a media  stock?

The World is Flat is both informative and though provoking. Friedman has followed this book with two others with similar themes: That Used to be Us: How America Fell Behind in the World It Invented and How We Can Come Back (with Michael Mandelbaum), which discusses America’s place in the new world of technology and communication and Hot, Flat and Crowded in which he discusses the dangers challenges facing the planet in this new world and how those challenges can renew America.

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Posted by Julian Livy on February 6th, 2013 | Posted in Book reviews |