The Productivity View — better is good?

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!

Footballing Management: Of talent and age

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.

What on earth is Strategic Innovation?

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?

Education Branding — How successful is it?

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“

Stakeholder analysis — What on Earth?

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!

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.

Reliance Power — An economic picture.

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!

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.

On Consumer Goods and Durables, and prepaid cards

A few days ago, over tea and pakodas, conversation turned to things managerial. I was sitting with 2 marketing chaps, and we were debating Consumer Goods and Consumer Durables, and how the wise men of marketing classify them.

Firstly we were thinking, “Maybe its about cost. Consumer Durables are usually expensive electronic equipment, and Consumer Goods are comparatively cheap things like toothpaste. And for a time, all was well. But soon people started picking holes into that fine theory. After all, price is a relative thing. An iPod  is incredibly expensive to me…but to Steve Jobs its a very small part of his monthly consumption. But he does not call iPod a consumer good!

So we spent some time researching this topic. Finally, I have an answer that I liked. So here it is!

A consumer good is one which has a finite (And measurable) number of uses. A consumer durable is one that can be used any number of times (or not easily measurable).

For example, toothpaste is a consumer good. Why? Simple! It is because it can only be used for 20 brushings. (25 if you use a small toothbrush). It does not matter if you do not use it for 1 year. After all, its now been rated in number of uses rather than time of use, or of price you paid for it!

We then realized that prepaid Cellphone cards are a perfect example of a consumer good. After all, they have a limited life, and their utility is perfectly subdivided….you can use it for x no. of minutes of talktime.

Now, this brings all sorts of analogies. Today, the cost of a Lux soap is not its manufacturing cost, but is its advertising cost. In the same way, we can expect the Telecom companies to become more brand agents than communication service providers. When is it going to happen? Or is it already happening? I guess we will have to wait and see!

Back to Management: Net Profits, and Cash Flows

Another long hiatus, I fear. But never fear, I am certainly still here! The last few weeks have seen very little in the way of new things learnt, as a result of which I did not have much to write about. However, a couple of days ago, I was made to learn a concept in finance that I found most impressive. This is the concept of cash flows…and more advanced topics like negative capital flows which will be covered in future chapters.

 

Accounting Wonders: Accrual Net Profit…and The reality, Cash Profits!

 

I would have to explain the difference between accounting profits and Cash profits. Now, Accountants use this concept called the Accrual system when they release their balance sheets and Profit and loss Statements. Briefly put, in the Accrual system, all certain future income and expenses are added to the accounts books. I shall provide it with an example.

 

The Bala-Saurabh partnership firm had to attend a competition in IIM Kozhikode. This meant that they had to travel from Kharagpur in the north to Kozhikode in the south. In order to make the journey on time, they decided to travel by air, and spent about Rs. 16000 travelling, eating, and doing other things. They ended up winning the competition, which carried a prize money of Rs. 100,000. In addition, they were reimbursed travel charges of Rs. 8500, which meant their total revenues were Rs. 108,500. However, this money was not actually paid out. The cheque is still in the mail, as I speak a month later.

In the accrual system, the net profit of Saurabh-Bala Partnership firm is equal to net revenues-Net Expenses

Net Profit = 108,500-16000=Rs. 92,500

But lets have a look at the bank Balance of the Saurabh-Bala Partnership fund. This was Rs. 19,000. After the competition, the amount in the bank was Rs. 3000.

So, although Saurabh-Bala made an accounting Profit, the reality is a bit different. Ratnakar Associates, a collection agency now demands Rs. 6000 as management consultancy fees. According to my net profit, I should have no difficulty in paying off Ratnakar. But if I go check my bank account, I would wind up Rs. 3000 short, and now have to pay the bank interest on my current account overdraft.

So this is a lesson. Watch out for the cash flows as well as accounting profits. This is true for the largest companies…and its true for the individual person as well. It all comes down to cash in the end. Notional things like future cash flows are great…but money in the bank is a great thing when the collection agency comes knocking at your door.