Business lessons from the past

Looking back in history can teach modern society many lessons. The past also holds business lessons. A particularly useful lesson can be learned from ancient Venice.

Picture: Pixabay

Insead alumnus Giovanni Tassini and Loic Sadoulet, Insead Affiliate Professor of Economics, have looked into Venice’s past to deduct the following lessons for today’s leaders: According to their article on the business school’s Knowledge website, the Republic of Venice (named “La Serenissima – The Most Serene due to its prosperity”) played a fundamental role in developing trade between the Mediterranean and the rest of the known world by the 15th century, thanks to its perfect position midway between Constantinople (Istanbul), the gateway to the East, and Western Europe. 

The important sea port utilized network effects, contractual innovation and coordination among its trading partners – all mechanisms that today’s companies still use for under-served markets. As the infrastructure in medieval Europe was not yet developed properly, communication was difficult. To obtain knowledge about new markets was a challenge and transportation risks were high, with vessels exposed to both piracy and unpredictable weather conditions, write the authors.

One of the solutions for the Venetian merchants was therefore network economics. Venetian merchants didn’t travel themselves but instead employed agents who lived abroad and acted on their behalf in a foreign market. In the mean-time the merchants coordinated the trade from home. “Agents were selected from the merchant’s personal network. The threat of social punishment if agents failed to meet contractual obligations strengthened the trust between merchant and agent and decreased the risk of deviation from contracts,” according to the Insead authors. “Today, network mechanisms play a fundamental role for companies trading in underserved markets, as a mechanism for creating trust and strengthening local knowledge in a region.” The article cites Dubai-based transportation network company Careem which uses network effects to recruit reliable drivers. Existing drivers refer new drivers to the platform. These are backed up by background checks and the system creates a trust environment which has supported the expansion in less-known markets.

Contractual innovation: Venetian merchants and their agents were bound together through a new form of contract called Colleganza. “Under the arrangement, the merchants remained in Venice and provided all the capital and goods for expeditions while the agents sailed abroad to sell them, buying new goods with the proceeds and bringing them back for sale in the Venetian market. Profits were split on a pee-arranged percentage, an agreement that limited the liability and risk for both parties and would later underpin the development of trade in the East Indies,” write the authors.

This Venetian invention also proves a contemporary success. The Insead team compares it to, a partnership between Facebook and telecommunications operators in emerging markets. Here the arrangement provides mobile phone users with free access to selected apps and websites on their mobile devices and this again provides an entry to the African market and the chance to gain a dominant position on the continent for Facebook.

Innovation in coordination: Venice also became so powerful and successful due to the coordination facilitated by the government. Ships were built by the state and contracted to private groups of merchants through a public auction. Owning the ships, the government was able to coordinate timing, group ships together and to offer military protection to the convoys.

A similar coordination is successful today according to Insead. An example is China’s engagement in Africa where the Chinese government introduced measures to enhance Sino-African relationships and where it facilitated the market by establishing the Beijing Summit Forum on China-Africa Cooperation in 2006.

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Barbara Barkhausen