Godly cash flows Sunday, Mar 15 2009

People think that the credit crunch is a creation of the 21st century. However, like the religious fundementalists say, all things are there in the scriptures. The Gods of India have a practical example of how individuals with low credit ratings are forced to accept loan terms which are frankly usurious. In contrast, we shall also see how a well managed fiscal plan makes living comfortably.

Our tale begins with Mr. Venkateshwara, a young god with a great deal on his hands, but not much hard cash to his name. One fine day, he finds this young lady and decides to marry her. But the young lady is not content with a simple court wedding. After all, this is a god’s wedding, and must be celebrated with the pomp and ceremony it delivers. So, Mr. Venkatashwara goes to Kuber Bank, a closely held firm controlled by its namesake, and requests a personal loan for marriage expenses.

Now, Kuber takes one look at the impecunious Venkateshwara (also called Balaji), and decides that this young man is what would be called sub-prime. And not only is he sub-prime, he also wishes to use this loan on a mere consumption expenditure rather than investment purposes. Automatically, the interest amount is now increased appropriately by rating the borrowers risk accordingly. Venkateshwara’s repayment philosophy also seems a bit dubious. Based upon this wedding, he intended to set up a temple where people could worship him, and thereby pay off his debt.

Well, to cut a long story short, due to low regulation, Kuber bank did make the loan to this sub-prime borrower, albeit at an interest rate that he considered was appropriate for such a high risk loan. As it turned out, Mr. Venkata’s temple was a spectacular commercial success, raking in over Rs. 500 crores a year (approximately INR 5 Billion).

But that is not quite enough. From the records that mythology provides us, this only counts as payment towards the interest portion, so that Mr. Venkateshwara stays out of the term “Stressed Asset”! So Mr. Venkateshwara, inspite of having fantastic cash flows is still indebted. If records are to be believed, he will only be able to pay it off at the end of the universe itself!

On the other hand, about a 1000 kilometres away, we have the example of Mr. Siddivinayak. An astute god, based out of India’s commercial capital, Mumbai, he has access to the finest financial consultants (the ones who believe that cash is king) in the world. Having been exposed to the business world’s ups and downs, he maintains a low level of financial leverage, ensuring that his debts to the Kuber Bank are always promptly paid off. As a result, although his revenues from his temple are at a comparitively paltry Rs. 50 Crores, he is comfortably in cash.

So there ends this lesson from mythology.

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Oil Prices–Price Elasticity Friday, Mar 13 2009

Well…my last serious post on oil prices can be found here. Back then, oil was at $80 a barrel. Since then, oil went up to $147 and is now at the mid forties after dropping all the way down to $30. Does economics explain this phenomenon? Well, lets have a go with that most amazing of tools, hindsight.

The total demand drop from 2006 to today ranges between 2 and 2.5% . Assuming that the predictors were expecting a gain of 1.2% yoy (a reasonable prediction), the notional demand drop would then be about 5%.

At the same time,  production has increased by about 1.5% over the same period.

In this period, oil prices have risen to $140 a barrell from about $40 and have come back down to about $40 a barrell. Can conventional price Elasticity explain this?

Even assuming the widest variations in demand and supply, we have about a 6% variation in demand and supply. This ^% variation has led to a price change of almost 300%. This would mean that demand and price have a multiple of 50. By my previous calculations, the multiple  was closer to 10 than 50.

So economics does not seem to completely explain this massive change in price. But what if the underlying multiple of 10 was also leveraged?

The theory behind perfect marketplaces is that more players there are, the more clearly the price in the marketplace would be provided. However, in oil, the actual deliveries are fairly small compared to the speculators who trade in oil contracts. In theory, these speculators are supposed to provide liquidity to the market thereby enabling it to find true price without distortions introduced by large market participants.

The problem here is that sometimes speculators themselves distort the market. In a bull market,  every speculator went long on oil, which distorted market price and ensured that the real price soared well above the price that the oil sheikh needed to purchase his private A-380.

However, the reverse also occured. When the bubble burst, the speculators had leveraged their positions, and now had to sell at any price in order to exit the market. This led to an equally dramatic price drop which has seen oil drop back down to $40 a barrell again.

Of course not all of this is due to the evil speculators. The US Dollar has been appreciating against almost every currency due to a flight to safety. A rising USD means that the Arab Sheikhs (who sell their oil in dollars) can now buy those English Football Clubs cheap. This also tends to drop the prices, and cannot be ignored.

Notes: The data is approximate but the base from which it was taken was the  International Energy Agency report of February 2009.  Any mistakes and incorrect assumptions are my own however.

Note 2: The strong dollar affects other things than prices of Football Clubs. 

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Boom & Bust: Reason or Panic? Tuesday, Oct 28 2008

Its been a fantastically long time since I last updated anything, but that is not for lack of things to write as much as because of lack of time and effort to put thoughts onto computer!

Well, no Management/Economics type blog can ignore the current economic Superhit show that is playing on all Business News Channels today, and mine is no exception. People are blaming the current mess on US Housing Market bubbles or irresponsible lending or greedy managers, but is that the REAL reason for boom and bust?

I am sure these are reasons for the current mess, but why not try to see if there is a deeper underlying principle here? And this morning, I finally think I have found one.

First the Assumptions:

1. People Consume all they produce

2. Productivity is something that is consistent and measurable.

3. Inflation does not exist (I know…silly one that, but will relax it later)

The Logic

Economic Growth is something that makes peoples lives better. Quantitively, economic growth means that people have more ability to purchase goods and services. This is easiest measured by money. If you have more money in your pocket, you are doing better than you were. The same is true for countries as it is for people. The more “Money” a country has at its disposal, the better it is doing.

So, how does the money that a country have increase? Well, its simple really if you think about it. There are 3 basic ways.

First of course, is if the people in the country work more. Lets say they all had 5 day weeks. Now they suddenly decide to work 6 days a week. Suddenly they would therefore produce more goods and thus would have more “money” (assuming all the increased goods are sold at the same price)

Second is if more people were to start working. This is 2 components. First, all those new young people joining the working population. Second would be if the retirement age of the country went up, thereby increasing the workforse. (This is assuming that all those who reach working age get a job…not all that easy!)

Third is if those who are working suddenly become more productive. Thus if a worker were given a new thingummijig that could increase his production rate, then more goods would be produced in less time with the same amount of workers, increasing the workers wealth. (Of Course, assuming that all that increased production is sold for a good price.

So this is my economic theory. ” The maximum long term growth rate of any country’s economy is the product of the growth in working population, productivity and hours of work.”

This seems very simple indeed. And the Boom and Bust that we see in today’s stock exchanges seems to me to be comeuppance for the rise that the Indian markets saw post 2001.

If the stock exchange rises by 50% while the constituents of the exchange grow by 20%, then the assumption is that the stock exchange has priced in an increase in one of the three parameters that I had laid down. But how much can productivity and workforce increase so that you can maintain the increasingly dizzying valuations that were used for companies?

So, now the Indian market begins to make sense. It may look irrational, but that is only because we lack the timeframe needed to judge things. Ideally, the stock market should have stagnated until its companies reached the size that justified their valuation. However, like a governer hunting for the position of stable equilibrium, the market had overshot the fair valuation and bumped the value too high. Now, in trying to find the fair value, the market has actually beaten down (certain) companies to values that are well below their actual capabilities.

Of course, the problem with spikes and troughs is that they tend to make the fundamental premise of economics fail, which is one where we believe that the market has rational decision makers. Todays markets are ruled by fear, and have little of the rational among them.

So what started out as reason is now culminating in panic. And I am now finally buying stocks…after 2 years of looking at the markets as a mere speculative gambling table, it looks like there are quite a few valuable gems lying there getting ready to be picked up. So like Warren Buffet says (or should have said)… a panic selloff is the time for the rational investor to buy.

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The Productivity View — better is good? Tuesday, Sep 2 2008

Well, its been a VERY long time since my last post, but never fear loyal readers, I am back!

Today I was looking at a ragpicker on the road, and thinking that it would be really simple to make her life a bit better by giving her a pushcart in which she could push higher loads of stuff collected and thereby earn a higher income. This is what is called a productivity tool, which is supposed to make the world a better place.

And surely, improving that ragpickers productivity might make it better for the ragpicker, thereby helping society! But a bit of thought brought some counterpoints.

Now economic theory states that if the ragpicker got a a huge competitive advantage by having a cart, a lot of people would have jumped on and bought/rented carts in order to improve their own productivity as well. This would make the entire ragpicker population even more productive than it used to be. Surely, that is a good thing?

Well…maybe not. You see, although the amount of garbage that the 17 or so million people in Mumbai produce is monumental, its not infinite. At the end of every day, the ragpickers of Mumbai, however unproductive they are, have sifted their way through the morass of dross, and have found their little pieces of gold. So improved productivity would therefore mean that the ragpickers would merely be done faster….not produce more gold from dross.

Well, even then, that would be a good thing undoubtadly. A ragpicker who is done by mid afternoon could attend evening school, get a mechanics job, move up in life, and then improve economically. But lets consider for a moment that the current system is a level playing field…mostly. The late wakers are not shut out, as they would have been if the early birds grabbed eveerything. So, although the total wealth out of picking through garbage would be the same, its distribution would now go to those who woke up earlier, and scouted out the best piles.

This greater inequality in wealth distribution would be accomplished by those with access to better information on which localities are putting out good garbage, or who can anticipate which garbage will yield better returns. Previously, even if people held this information, they could not corner the market, as the information flow filtered down before they could grab it.

This seems to show something strange. Improved productivity does not lead to better conditions for all. Infact, in this case, it leads to much greater inequality. And this is what I would call the productivity trap. In a place where productivity improvements do not lead to increased sales/offtake as well, it only would lead to inequality.

Of course, there is always a silver lining. If you are a nimble company (or a person) and can see that the existing players are unproductive, you can move in and quickly make yourself a number 1. However, be warned that your advantage depends on you having a productivity too that can’t be copied….and no one seems to have come up with one as yet!

So there you go….another rambling post, but my tale is done for now. I will post on slightly less garbage like topics sometime later. Till then… Ta Ta!

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General Update Tuesday, May 27 2008

Well, its been some time since I have posted anything. So, I guess its time that I deliver a general update on life, the universe and everything (almost) that I am doing.

Well, the groves of academia have hereby hurled me out, ensuring that I get to face the real world again. And from the small and sleepy university campus of IIT Kharagpur, I am now at the western corner of India, in Mumbai, the city that almost lives up to its reputation for never sleeping

I have joined my work with YES Bank, and the hours ensure that its certainly a good excuse for not posting (although I shall not use it). But rather than talk about work, why not the city?

Mumbai is a unique place. Each of India’s metropolitan cities is different, but Mumbai revels in its uniqueness. Everything, from the city’s straight line like layout, to its odd working hours, its cobbled (almost) main roads where traffic rattles along day and night is unique. Mumbai is like a mad scientist on adrenalin, up to no good, but hiding behind a veil of equations.

Mind you, I rather like this mad city. Its very different from the sleepy Bangalore, and the early-bird Chennai. Even the sun sets later here than the rest of the country, with it being bright enough to play cricket at 7:15 pm.

Well, that is enough for the day. I will continue with more management gyan from my next post. Mumbai has given me at least 4-5 new posts on economics already up and running. But it will have to wait till I find the time to put them down on computer! Till then!

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The War of the Currents Wednesday, Apr 16 2008

Ok…its been aeons since I have done a history post…and even longer since a physics post, so why not do 2 in 1 and do both together! Its time to do a history of power transmission!

The Main Characters Involved

Once upon a time, there lived a magician. Almost deaf and self educated, he played a major part in the history of Industry. He was known for perseverance, and for a factory that burnt down as well. His name: Thomas Alva Edison, more colourfully known as”The Wizard of Menlo Park”

The second chap in this was  rather less colourful. He was known for an obsession with Railway safety and his major contribution prior to his adventures with electricity were his amazing invention of brakes for railways. Even today, the air brakes that are used today are a product of George Westinghouse, who shall be called “Moneybags“

The third chap here is as much of a character as Mr. Edison. Rather than Gandalf, it was he who was first called “Wizard of the West”. A mathematician and an inventor, he was a former employee of the Menlo Park wizard. After some harsh words were said on both sides, he quit to fight his battle for efficiency and superior science. His name: Nicola Tesla.

The Technology:Sneak Peek

So what did these chaps fight about. It was no less than the way the new magic of the century, electricity would be transmitted. It was a battle between Alternating Current and Direct Current. The battle between AC/DC.

On the DC camp stood the reigning champion, and knight of the American derring do spirit, T A Edison.

On the side of  AC, the challengers were an embittered Nicola Tesla and Westinghouse.

The Rivalry Begins:

Nicola Tesla was originally a humble scientist, working under the heel of an acknowledged genius in Edison. But Tesla was also a super mathematician type dude, while the more prosaic Edison was merely a brute force experimenter. Tesla was a huge fan of the newfangled Alternating Current that promised revolutionary change.

Edison though was not entirely for things that used imaginary numbers and wave equations. In his opinion, if you had to use things like root of -1, you were off your rocker a wee bit. But being a fairly loud-mouthed guy, he proclaimed to Tesla that if he ever got an AC motor working, he would get a bonus of $50,000 (no mean sum at the time).

Tesla of course was truly fascinated by that grand sum. He spent days working, and nights calculating under the patented light bulb of Edison and Swan’s GE. Finally, after months and years of toil, he came up with an awesome AC generator that works. He goes smiling proudly to Edison, and shows it to him.

Unfortunately for him, Edison was a bit deaf. He claimed that he never heard himself say such a ridiculous thing in his life, and laughed at Tesla. It might have also been exacerbated by the fact that Edison never really understood the principles by which AC power was generated and transmitted as well.

Tesla decided that this would not do, and ran away in a huff, threatening to do Edison in someday. Thus a magnificent rivalry was born.

Enter Westinghouse

George Westinghouse was no mean inventor himself. With patents pouring in for railway safety brakes, and a machinist par excellence, he was an inventor in the mould of an Edison. Unlike Edison though, he was also a big believer in the utility of calculation and mathematics in invention. Spotting Tesla out of work, and digging ditches in New York, he realized that he had an ideal employee on his hands.

Back to Technology– The Numbers

Edison’s DC current is comparatively easy to understand, and is based on middle school physics. Power transmitted is given by VI, where V= Voltage and I= current. However, power loss is given by current squared multiplied by resistance of the wire. At low voltages, the power loss is rather large, unless the diameter of the copper wire is made terribly large. However, high voltages were deemed to be unsafe, and Edison was using DC voltages of about 110 Volts.

As a result, power losses made it impractical for Edison to transport electricity across large distances. The resistance would have killed him. Edison was nothing if not a canny businessman though. He started making tonnes of generators that generated electricity locally, and started selling them. This ensured regular sales of GE generators, because the effective radius of even the largest DC generators at 110 watts was a couple of miles.

Now, AC is a whole different ball game. The power loss is practically the same at a given voltage (we won’t go into the formula. Like Edison, I am not a formula guy!). However, AC has the huge advantage that it can be “stepped up” and “stepped down”

Enter the Transformer

The transformer was the device that made AC a great option. A transformer is a very simple device that converts electric voltage up or down. By winding more wires one way or another, you could generate power at one voltage, then transform the voltage up. From basic electricity we can say this:  V1I1=V2I2. When Voltage goes up, the current carried by the wire goes down. Power loss is calculated as I*I*R. Now, when Voltage goes up to 22000 or 40000 Volts, the current drops dramatically. Now, I*I it becomes very small, and power loss is lessened dramatically. Near the end consumer a transformer is used  again to drop the voltage to a usable level.

Of course, the catch was that a transformer could only be used in AC. It could not be used (for various reasons)  in DC format. The various reasons include esoteric terms such as inductance and flux, but this is not a post about physics, but history.

Return to the Battle: Publicity time

Westinghouse and Nikola Tesla  began to make an AC Generator that would unshackle the world from Edison’s DC generators. But it was hard toil. Firstly, AC current keeps cycling up and down, which in lightbulbs would mean a flickering of light bulbs as current cycled between two extreme values.

Then there was another problem. Cyclic voltage tends to do something nasty. The shifting voltages cause the heart to change to an irregular rhythm, which tends to lead to a quick trip to a nearby graveyard. Low Voltage DC does not cause any such problems. And Edison knew exactly how to exploit this unfortunate “feature”

Edison launched a campaign which attempted to prove how dangerous AC was. Initially, he started by electrocuting cats and rats. Soon, he progressed to man’s best friend.  Size of course matters…he continued by going after horses and then cattle. In a fit of extravagance, he completed this with a finale where he finished off an elephant with AC.

But this was not enough. The AC Camp led by Westinghouse was still winning. Now Edison was getting desperate. First he tried to replace the term electrocute with the phrase “to Westinghouse someone”. That did not work out too well though. It never did catch on. Although Edison was against the death penalty, his business interests now dictated he needed to do something radical. Size did not seem to matter in the war. Now it was time to change tack. He began a secret product called the “electric chair”. Soon an instrument of death was ready, and an unfortunate convict was ready as a test subject.

As a deterrent to crime, it was a staggering success. The dashed thing failed on the first attempt, merely leaving the guy with severe injuries rather than killing him. After several tries, he was finally put out of his misery, and it was described by one appalled journalist as, “It would have been kinder to kill him with an axe!”

Unfortunately, as a proof of concept, the electric chair was not quite an unqualified success. The tide was beginning to turn in the favour of the Westinghouse camp. Soon, the death knell for Edison’s generators was about to sound.

Niagara Falls

The Niagara falls were the holy grail for power guys. Here was a mountain of water falling a few hundred feet, which had the potential to generate enough power for the whole of the North-east USA (at the time). The catch? It was just too far away. Any chap who generated power in the Edison way could not actually transmit the damned thing without losses that crippled it to unusability. Westinghouse lobbied long and hard, and finally got the permission to generate power in AC so that it could be transmitted easily. And since Edison’s GE was too powerful to be ignored, it got the contract to transmit this electricity. With this, Edison ended his opposition to AC power, and the war of the Currents was won by Westinghouse and Nicola Tesla.

Epilogue

Tesla was known as the wizard of the west. There is little doubt that he was at least partly responsible for the way the 20th century became the century of electricity. However, his rivalry with Edison was not tempered with time, and it is curious that neither Edison nor Tesla ever won the coveted Nobel prize. Rumours still abound that it was jointly offered to the two of them, but Tesla refused to ever accept a prize alongside Edison. Later in life, he began to make futuristic predictions about wireless electricity, but these were never considered practical, so he was slowly shunted away from mainstream science. But he forever gloated about his joy at defeating Edison.

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Footballing Management: Of talent and age Sunday, Apr 13 2008

My good friend Ratnakar is a great fan of football manager 2008. During his interminable hours of play with that game, he came up with a fantastic observation that makes for good learnings in management as well!

A football manager is always scouting for talent. And football has 3 major types of players. They can be split into the strikers, who range forward to score goals. They include stalwarts like Ronaldo and the more recent Wayne Rooney. Pace and raw talent makes them great

The next group would be the midfielders. They are the stars who play at the centre of the pitch. Their skill and artistry are the tools that they use to weave magic at the centre of the pitch. Bamboozling the opposition, they are playmakers…either going down the centre or running down the wings. David Beckham and Zinedine Zidane are the most frequently quoted lot here.

The neglected bunch in this group are the poor defenders. Usually sitting at the back, they are known for trying to block those heroes, the forwards and strikers from doing damage. To do this, they can slide into the striker (if they get the ball first), shoulder barge the man, or just kick the ball aimlessly away from the strikers.

So much for context. Now lets look at average age and price of a striker. Strikers are most valuable when they are young. between the tender ages of 19-25 they are at their fastest, and with spectacular reflexes, are capable of feats that most cannot even imagine. Its no wonder that a Wayne Rooney would be transferred off for an almost 50 million dollars at the tender age of 19. By 25, he would be all burnt out, and his market value drops significantly. But if like AC Milan, you get a Kaka at $8.5 million dollars, you can get a great star at bargain basement prices.

As for wingers and attacking midfielders, they need pace first…and although they need those reflexes as well, they are not quite in the same league as star strikers. But because they control the game, and are versatile, they get paid staggering amounts too when they are young. Here, the retirement age would be close to 30. David Beckham at 32 is seen as over the hill, although at 25, he was seen as at his prime. So he has to play in the USA because the Real Madrid’s and the Inter Milan’s of the world no longer see him as the star he was.

But defenders just seem to go on and on. For example, the AC Milan and Brazilian defender Cafu is 38 and going strong. Defenders hit their peak at 32-35, and can go on even longer. That is because the defender is not about pace as much as anticipation and experience. Like wine, they get better as they get older. So Cafu is worth a lot more at 30 than at 20, and his market price is fairly detemined.

So where is the management analogy? well, here it is. In management, as in football, different people perform different functions. Each person’s talent is valuable at certain stages, and experience is valued at other stages.

In a marketing manager, the hunger to get hold of a new acount makes a young man take a bus 500 km across beat up roads and obscure villages. Here, his experience does not count as much as his hunger and drive for success. And only when you are young can that hunger be matched with physical stamina and committment to career. As the marketing man grows older, he might marry, settle down in a city with 2.2 kids and sit back. He might no longer want to spend every weekend hunting for those new accounts. Instead he would be content to spend his days at the corporate office, using his experience to design corporate “strategy”. A sales and marketing star is a bit like a striker, who is best at a young age.

On the other hand, the finance and legal team are more likely to be the defenders of the firm. A finance man needs to know the ropes and learn through time. No matter how talented he may be, a few years in the trenches help the finance man develop a “feel” for the numbers that talent does not always give. And the legal man needs years and years before he knows which loopholes can let the proverbial elephant pass through, and which ones will merely drown you in a morass of legal battles. These gentlemen tend to be most valuable in their 50’s when they know the tricks of the trade (And keep themselves updated with the latest moves).

The problem is this though. When you hire a young marketing man, you always take a risk. He or she would be unproven and untested, but only when they are young can you extract maximum value out of them. Getting the right pay for these people is a challenge. If you underpay a star, the star shall disappear faster than beer in a college party. But you always run the risk of overpaying someone who is later found to be unsuitable.

The issue is very different for experienced financial managers. By the time they are 40-45, they have a proven track record. By this time, the market prices them fairly. So the problem here is that you never actually can get a bargain basement finance guy who is very good. The market ensures that the good ones are already paid stratospheric levels.

So, what’s the lesson? Well, its this. Recruiting talent is tough. But while recruiting, it might be suitable to evaluate what “hunger:experience ratio” is. It makes it easier to decide at what age and price a person ought to be recruited at.

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What on earth is Strategic Innovation? Tuesday, Mar 18 2008

This is a bit of a morality tale. A lá David and Goliath. But bear with me. I promise there might be a point at the end of this.

Once upon a time, there was a mighty giant called Yahoo. It ruled the internet, being the gateway and gatekeeper for much of the online world. If anyone wanted to go anywhere, they went to the Yahoo god and prayed before its altar for knowledge. This gateway used to be called a “PORTAL”. From this web portal, the internet user was allowed to search for that which he needed, and if he were especially lucky, he would find it, albeit after much searching and swearing.

Then in early 1996, a couple of young Stanford students, Larry Paige and Sergei Brin stumbled on to a research topic. They wanted to see what the relationship of each website was with another. Halfway through their research, they had what would be called their “aha! moment”. Up to now, search engines trawled the web, looking for the search string that people had typed. The more times the search string appeared, the higher the ranking of the web page was.

But Larry and Sergei had a different idea. Their idea was this, ‘If a website has the text that is being searched for, its not enough. It should also be linked to by other sites…which means that lots of websites think that this page is good. IF those websites are also linked to by lots of other websites, then its even better! It means that the page that is found is really a good page and should be the one the user wants. This was the genisis of their holy grail…the “Page Rank Algorithm” (enter flourish of trumpets).

This was a far better way to search than the existing web portals. Yahoo immediately recognized this, and invited Larry and Sergei to take over Yahoo’s search for a fee (the exact number is not that important). Larry and Sergei registered google.com, and then history as we know it changed forever.

In just about 10 years, Google moved from being two scruffy Stanford students to a several billion dollar teddy bear that vows to “Do No Evil”. At the same time, poor Yahoo, from being the web portal of the world languished in web purgatory, first being hailed as a stalwart in the dot com killoff, and then pilloried for being a fuddy duddy in an age where wonderous phrases like web 2.0 and social networking were being bandied around. Today one and all worships at the altar of Google, which has those funky text ads and makes money by truly not doing any evil. The god that was Yahoo is now on the backfoot fighting off another ageing suitor in Microsoft.

So what does this little David vs Goliath say? To me, it seems to make a point that always seems to happen. The big companies seem to have a serious problem adapting to change. Sure, there are exceptions. But every large company had to start small. It started off with something new, what the strategists call “competitive advantage”. But over time, this “advantage” begins to erode. For Yahoo, the advantage of being the 900 pound gorilla eroded when Google came up with a radically different way of searching for things on the web.

This actually seems a bit strange. After all, Yahoo had a heck of a lot of money. It should have been able to research a new search algorithm method much easier than two (possibly) cash strapped young students. But it did not. And this seems to be the case more often than not. Large companies have the money, the talent and the drive…but they somehow do not seem to innovate as well. Why?

One reason that comes up is comfort. For Yahoo, they were comfortable with their way of working. They believed in something called incremental innovation. They tried to make their search technology work faster and faster by crawling through the web searching for words the user typed faster. So they kept investing money and talent and drive…but diminishing marginal returns was setting in. A user does not really care if the search engine returns results in 0.1 seconds or 0.01 seconds. He cares if he gets what he is looking for!

Yahoo was delivering faster results. But Google was getting better results! This is called disruptive technology. It was like cassette players versus CD’s. There was just no comparison. CD’s won every time!

Now, Google is faced with a challenge. They disrupted the entire search industry with their funky search algorithm. Are they going to rule forever? Unless they keep running, probably not. The reality is that Google is still not perfect. Someday, a better search algorithm will come out. The probability is that Google will be busy making its page ranking algorithm more and more efficient. Some disruptive type thing might appear and totally wipe Google out. In order for Google to actually come up with another disruptive technology, it needs to throw money and talent at seemingly fruitless lines of research that might have NOTHING to do with better search engines.

Its a tricky tight-rope to watch. Even google does not have enough money to spend money researching all sorts of things. But Larry and Sergei know that if they only spend their time perfecting page ranking, they will end up beaten to the gun by a more nimble competitor.

One solution that the strategy books give is to continually scan the world around us. The instant anything that looks like a promising search tech. arrives, Google has to buy it out, paying exhorbitant sums of cash for it. If they plan well, then they can still maintain their advantage…if they don’t….they go bankrupt.

Another way to go is to madly research away, and hope like hell that something you do clicks. It does not have to be related to search. Maybe a better mail client, or a chat client…or even a mobile phone! Again, the worry is that madly researching diverts attention from the avenue that actually makes the company money…and that is search, and text ads.

So lets watch out who the next David is going to be. Will it be the return of the Yahooligan? Or will there be a new player altogether, crowding out both grandpa and the teddy bear?

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Education Branding — How successful is it? Saturday, Mar 8 2008

Today I was reading some old new stories about how several of the top colleges around the world are aiming to become global universities, imparting quality education at several places across the world. Examples abound, with Carnegie-Mellon and Harvard globally, and in India, SP Jain with its Singapore Centre, and IIM Bangalore with its planned Singapore centre.

The question that has to be asked though is whether the universities are truly becoming global, or whether the universities are trying to tap into the global brand that they seem to have acquired; almost by accident. An example is George Mason University, that launched an overseas subsidiary in one of the Emirate states (I don’t quite remember which one). With local faculty, and funding from the Emirate itself, the only way the brand is able to sell itself is by claiming that the course curriculum is based on the United States curriculum. But you have to consider whether a course that is designed for students in the United States can be directly imported to another country and culture.

In order for a brand to succeed and be sustainable, it requires to deliver profitable value over a long period of time. So, the brand should make the user pay a premium for the benefits the user perceives he/she gets from it. In educational institutions, I find it hard to believe that institutions can deliver equivalent value. Standardization has not yet managed to go far enough that curriculum and teaching styles can remain constant, or even consistent across the world.

Having said this, can we make this statement reversible. IF the problem is one of distance and cultural difficulties in curriculum, it should be possible to set up education franchisee networks over a region or area that is homogenous. And this seems to be true. This is most visible in the state of Andhra Pradesh, where the Higher Secondary (Grade 11-12) education system is highly corporatised. Here, a Nalanda institution can replicate its business model in IIT mad AP, and try to standardize a curriculum to suit the requirements of its students.

In fact, I have heard that this education has its own tiered system, where students are evaluated on their ability and put into seperate streams to tackle entrance exams of varying levels of difficulty, with the créme de la créme heading for the IIT JEE.

The rights and wrongs of typecasting students who are 15-16 years old are not being debated here. But these education franchisees are rapidly becoming factories, where at one end, you put in a 15 year old, and the other end you get a 17-18 year old entrance exam taking machine.

The education sector is yet another service sector. And if the Software Services Sector can use metrics that ensure repeatable service delivery, should education be far behind? As of now, the local delivery model has been perfected in certain areas. At the end though, I will leave this post with a quote from Oscar Wilde,

“I have never let my schooling interfere with my education“

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Stakeholder analysis — What on Earth? Thursday, Feb 28 2008

The last two years have transformed me from an almost socialist young man to a not so young town crier in favour of capitalism and shareholder value.

After a year of roaming around various B Schools around the country shouting to one and all about maximising shareholder value, I entered Investment Banking class a few days ago happily expecting to continue more of the same theme.

I was shocked instead when my (formerly gung ho pro business) prof started off on stakeholder analysis for companies. But once I got past the initial, “Shareholders returns are everything” part, it actually begins to make sense.

If we consider that a company’s goal is to make money and stay in business for a long time, its business model must be self sustainable and fairly long term. And my prof kindly pointed out that if you only worry about shareholders and decide to milk the customer for all he/she has, you will end up without customers at all.

That was fairly obvious, so I almost switched off. Thank goodness I did not though, for his next set of remarks really have changed the way I look at profitability. He made the simple claim, “People will pay what they think is fair. IF your company, for whatever reason, is charging something different than this, there will be consequences. If the company is forced to undercharge (for eg: regulation), then the company will not really care enough about the customers, and will downgrade service. If the company overcharges, on the other hand, competition will immediately arrive, and migration of users will happen” So far its just a rephrasing of the initial argument. The last point was…If a company thus has to forecast its growth and discount its future cash flows, it should therefore first see how much it can gouge its customers for and whether they will stand for it. And not just customers. Every component along the value chain, from suppliers and employees, right up the government and the general community has some reward that it percieves in keeping this company afloat. It is necessary for all of these to be satisfied first on the balance sheet and the income statement, before the shareholders can stick their grubby hands into the till, or Profit after tax.

Interesting viewpoint. First ensure that all the stakeholders who ensure your business is a success get their pound of flesh. Only after all of them get what they want can the company reward its shareholders.  Even re-investing existing profits now becomes a very clear matter of whether your stakeholders want you to do it or not. Its not only about the shareholders and the board of directors. In the end, every person has to have his/her interests served. Only then can that magic phrase, “maximise shareholder value” be realised.

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