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

Management , blahla 9:48 pm

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.

 

Web 2.0 — I am finally a fan! Wednesday, Feb 27 2008 

Management , blahla 10:14 pm

I fear I am rather a traditionalist when it comes to business. If I can see the product, or use the service, I am a fan. If not….well, I tend to make nasty statements and rude gestures at the company/product.

The web 2.0 “paradigm” has been one of those phrases which has not hit it off with me. I do realise that user generated content is very fine and everything, but I had not really found user generated content making money for itself. Its all very well to give facebook a market capitalisation of $15 billion. But until social networking builds a business model that is more than ad based, it seems hard for me to buy into the hype.

But now for the good news. Over the last few days I have discovered Youtube, and seen some samples of the best that it can offer. I had a rather low opinion of the typical “user generated content”, but after having a look at some of the music groups doing the rounds on youtube, and creativity being shown by some video makers, I have to take my hat off to them.

There are certain groups out there, whom I would pay hard cash to have their songs. And if the web 2.0 interface makes it possible for content creators and customers to meet and pay each other (a marketplace, in other words), it would be a model that would certainly help money to be made. I am still not sure that the current framework allows that, what with security issues and all, but security and processes are only implementation problems and not problems with the idea itself.

So, now I finally accept that web 2.0 has a profitable future, which may well extend beyond ad revenue or confidential data selling. Whether it is the revolution that it hypes itself to be…probably not. So far, it has the potential to be what was only previously found in theory, “a perfect market”. Whether it lives up to that dream is to be seen.

 

New Music Found Tuesday, Feb 26 2008 

Music , , blahla 9:00 am

I have to admit, I was under the impression that the Indian Music scene was not in the best of shape. But after hearing this, I am happy to be made to eat my words. If music like this is coming out of here, its in great shape.

Now to give it the publicity it deserves! :) The band is Junkyard Groove, and the American accent is because of one American who is the lead singer. I am now going out looking for more by these guys!

 

Reliance Power — An economic picture. Tuesday, Feb 12 2008 

Management , blahla 2:43 pm

Today, Reliance Power’s IPO debuted on the stock exchange….and the results were disastrous. As one fundamental analyst said, “No one could have imagined it listing below its issue price”.

But lets take another look at it, shall we. Let us forget the complex process that valuing a company involves and instead merely look at simple demand and supply, and try to see what happened.

At first sight, it seems like Reliance Power had a huge amount of pent up demand for it. With investors oversubscribing hugely, the 3 billion dollar IPO had about $95 billion worth of bids. But how many of these bids were serious? From the retail investor perspective, I am confident that a vast majority were not interested in investing, but in selling the stock on the very first day. Almost every person I knew (a biased sample of MBA’s if I have ever seen one) was in this to sell on day 1. These retail investors were never going to buy more RPL shares in the secondary market…so as a source of demand, they can be completely ignored.

This leaves financial institutions and High Net Worth Individuals. What people expect on day 1 is that those financial institutions that did not get an allotment would buy stocks of RPL at market price, thus acting as a support. The problem is that the Financial institutions and the HNI’s have not supported the IPO on listing. And this is because they have also decided to try being traders. With the Stock Market’s valuation looking increasingly frothy, in order to make returns that the investor expects the funds need to invest in increasingly risky ventures. Reliance Power and its listing has merely exposed the inherent risk that pervades the stock market post a huge increase.

Does this mean the India story is all froth? I don’t think so. But to expect a stock market to grow 50% year on year , year after year when the country’s economy grows at 9% is not realistic. Eventually, the growth of the stock market will reflect fundamental profit growth of the corporates that make up the exchange. This time has arrived for Indian Markets.

 

The Optimal Team Size — Don’t have threesomes! Sunday, Feb 10 2008 

Management , blahla 7:13 am

Last evening was spent discussing HR and team dynamics over a leisurely dinner. During this period, a rather interesting point was raised.

What is the optimal size of a team? And if there is isn’t, what is the number that should NEVER be made. A friend said, “Odd number teams just don’t cut it…and man, the worst team size is a threesome!”

It was a good point. I have personally seen several teams of two people working and working very well together. And I have occasionally seen teams of 4-6 people performing wonders. But I am hard pressed to recall teams of three that have sustained success.

Why is this so? Partly is due to the whole problem of threesomes…its impossible to distribute time, effort and rewards equally and equitably to all three members of a team. Also, as pointed out by above friend, in a three member team, if two members quarrel, then the third member is forced to take sides. In a larger team, this is not as compulsary as in the illfated 3 member team.

Finally agreement was reached….If ever a 3 member team could work for a long time, one of the members had to be a saint who had to be spectacular at negotiations. And these mythical beasts have long since vanished from the corporate jungle!

So, till my next post.