Friday, September 30, 2011

Balaji Wafers-David vs Goliath turned on its head

I recently read on Gaurang Kapupara's blog( about the success story of Balaji Wafers. It did not strike me with much surprise, because I've witnessed this phenomenon during my travels in Maharashtra, Gujarat and Rajasthan. While its competitors(Pepsi/ITC) own the distribution relationship, with Haldiram having the premium branding, Balaji Wafers has carved out a value positioning('cheap at its price' in MBA jargon). And now, others struggle to match it despite their fully depreciated machinery and existing relationships, or maybe because of it.

Another player(Samrat Namkeen) has taken the chips market by storm. While others offer a measly airfilled 35gm potato chips pack, it gives 60gms pack for Rs 10, that too masala flavoured chips. No wonder then, that its stocks run off the few shelfs they are kept on('few' because the price differential is so much that retailers know they will not be able to easily sell the other stock if they keep Samrat).

So what do these teach us? It is essentially conventional marketing turned on its head. These players do not spend(waste?) money on branding, and instead let quality and price do the talking. This was the earlier(non American) way of doing business before the marketing/advertising craze caught on. So will these players remain or be brought out/turn into contract manufacturers? There is plenty of material for a MBA case here, if only people will bother to step out of their ivory towers and smell the roses.

Monday, September 26, 2011

Legalizing speed money-the global trend?

Today, we had a guest lecture by one of India's renowned intercultural consultants, Sreemathi Ramnath( While mentioning the different cultural attitudes towards bribery, she made a distinction between speed money(paying to get your legal right faster) and bribery(getting what you are not entitled too). I dissect this issue further in this post.

  1. Any temple of repute has a 'special darshan' where well heeled(or well connected) devotees can avoid standing in the serpentine Qs, and instead finish their darshan in a jiffy. Initially, this used to outrage me because if devotees are not equal before God, then where else are they equal? Then it struck me that those in a hurry would devise some way to break the Q, and end up enriching the guardians/priests. Instead, this system ensures that the temple grabs that economic surplus. 
  2.  Another example is the tatkal reservation system in trains, which replaced the earlier manual manipulation of reservation charts to benefit those in a hurry. Now, tatkal transparently allocates seats to those willing to fork up that extra bit of money. 
  3.  Even for that citizenship identity(the passport), those in a hurry can pay an extra fee and legally get their application processed faster.
  4. Inventors in a hurry to publicize their patents, can pay the Patent Office an extra fee to get their patents published on a priority basis(and thereby signal their belief in its commercial utility and validity). 
  5. The Ministry of Company Affairs can now approve company formation in less than a day, provided the applicants use a professional to pre-certify the application forms. Granted that the professional runs the risk of penalties and disbarment for wrong filing, but for the most part in routine cases, this provision allows the professional to extract a 'rent' from the company-a refined version of speed money. The applicant pays the professional extra fees, so that the processing is done faster
But then, this practice is not that new fangled. Banks, Photography studios and courier agencies have a hallowed tradition of charging more for faster delivery. The modern science of activity based costing has merely justified this practice, as has another favorite consulting jargon of value based pricing. 
Takeaway:-Try spotting more such practices around you, and do not get pissed off. It is just economic logic-the system captures the rent instead of corrupt people within the system.

Sunday, September 18, 2011

What gets measured gets done-some unintended consequences from poorly designed metrics

Whether as students, employees, business persons or investors; we are measured by, and measure others by, metrics. The standard rationale for that is to use a standardized way to be more ‘objective’. But wrongly designed metrics have unintended consequences 
  • ·         Research/Industry Interface/Foreign experience/Perception being given weightage in B-school rankings encourages colleges to encourage creation of poor quality research, invite industry personnel to ‘sell their company’ on campus under guise of industry interface and market the foreign student exchange as a fun trip instead of an educational experience.
  • ·         The expectation to beat the street consensus EPS was a factor pressuring CEOs/CFOs to cook the books and focus on that metric, to the exclusion of cash flows, profits etc
  • ·         Customer service has been given lip service in Indian service organizations(so ironic that the same outsourcing companies who win rave reviews from foreign clients do not seem giving a damm for their Indian clients), and now the regulators(IRDA/SEBI/RBI) have had to step in. If the investors/regulators/’Best Company Rankings’ had taken this factor into account earlier, surely there would have been some improvements.

So how to get it right? Like everything else in life, this is an art. But some get it right, by aligning the metrics to its strategy. For instance, the premier engineering conglomerate L&T has expressed its intention to divest some subsidiaries by 2015. Hence, the compensation plan of its top executives adjust the reported profits to exclude any divestment gains/losses, which are not wholly decided by them.

Takeaway:- List the Critical Success Factors, find the performance measures needed to address them, and then numerically express those measures as KPIs. And then you MAY begin to get it right. 

Why is the reading habit dying?

·         Expensive books-we are poor(!)
·         School Libaries-in the budget strapped scenario, that’s the last priority.
·         General dumbing down of syllabus-it is possible for State Board students to clear the Std 10 exam(maybe even get a distinction) without having read a single book.
·         Comic Books-the general introduction to reading- replaced by those same comic serials.
·         Reluctance to spend on non academic books-seen as timepass and not worth it even for food. This reluctance to spend on CPE/self development extends beyond books, perhaps because the quality of programs/training is not that good
·         Attention deficit-TV has really reduced our attention span and made us used to instant gratification.
·         Multimedia-books not multimedia. Ebook reader allows colour BUT audio books still quite expensive and presently impracticable
·         ‘Uncool’ since reading associated with being a studious type which teenagers don’t like
·         Parenting-not all literate, nor do all give time to read to their young children(best way, it worked for me atleast).
·         Indian editions out of data(both academic and others).
·         Indian ‘pulp fiction’-Gresham’s law-Wheeler’s stalls as examples-'good' books are driven out by the pulp fiction of today priced under Rs 100(I'm not meaning to sound elitist it is just a fact)

The light at the end of the tunnel
·         Libraries which supplement corporate librarires
·         Libariries on wheels-free home delivery
·         Ebook readers.
·         Comics on mobile/relaunched

Presenting data properly-some dos and donts for power point PPTs

After years of seeing poorly presented data in slides, I thought it was time to design my own.pointers for that. This post is more from the MBA side of me. Comments are welcome. 
·         Zoom in to fit within the screen:- Else within the time you scroll to and fro for making your point, you have already lost the audience.
·         Proper use of decimal rounding-Please do not show stuff like 1.348575 on slides, it really slows down the reader’s pace of comprehending.
·         Color Code cells aptly:- For cells containing key assumptions, results and information, you may like to highlight them for the audience to look at
·         Embedding is fine but check that it opens:- Embedding the spreadsheet as an icon is elegant and good, but test that it opens on the system you are presenting on. Otherwise, it could be a flop show.
·         Stick to slide wherever possible instead of opening workbook:- People have done their homework and should be convinced by your story enough to avoid demanding that. If you can present the key aspects of the spreadsheet as a slide, it will avoid breaking the flow of the PPT.
·         Appropriate units:- As per audience level and background-applies both to unit size(MM/BN/Crore) and currency($/INR)

How CAs are like doctors, archaeologists and other professionals.

A practicing CA and a visiting Prof to my college Prof FCA Gokhale sparked off this thinking with his repeated analogies comparing the medical and CA professions.  That got me thinking to other analogies, and this post was born.
·         CAs and doctors:- A good doctor reads the patients symptoms(indicators) and tacitly elicits information(like management representations!).
·         CAs and archeologists:- Given that a statutory financial audit is on transactions which happened in the past, the CA does not have a time machine to go back and check that everything was done 100% in order. That is why the assurance is ‘reasonable’ not ‘absolute’, and hence the need to triangulate evidence as good archeologists do(carbon dating, historical records, land patterns..)
·          CAs and lawyers:- Despite the abundance of lawyer jokes out there, good lawyers DO exist, and they tell it to the client as it is-merits/demerits of case, chance of winning and cost-benefit analysis. Also, they generally operate on fixed fee irrespective of case outcome. That is what CAs are supposed to do in most litigation support and advisory assignments.
·         CAs and statisticians- Statistics is all about presenting data in its most relevant and useful form. And that is what adds value to plain numbers. After all, any MIS/report is ultimately numbers sliced and diced in a context. And beyond descriptive statistics, the huge data volume and resultant sampling requirement is making CAs master the nitty gritties of statistical sampling, test of hypothesis and other inferential statistics. Ultimately, all audit standards are a fine balance between Type I and Type II error
·         CAs and detectives:- Detectives(as those detective novels/CID/films would have told us) excel in finding patterns and looking for the unexpected. In case of audits, the obvious thing is the final entries/vouchers. But the invisible stuff(non J/V adjustments, cost allocation spreadsheets, computations & recomputations, reconciliations) is often more valuable, as is peer analysis.
·         CAs and historians:- Like many other things in life, financial statements audit is a path dependent process. As generations have discovered(and will doubtless discover in future), those who forget the past are bound to repeat its mistakes. Therefore, the auditor’s permanent file provides some continuity to the audit to record the cumulative learnings/client insights. 

Saturday, September 17, 2011

Are we are slowly losing our ability to think?

During a discussion with my IIM-A strategy Prof Sunil Sharma, in the context of dependence on spoon feeding, he mentioned a very interesting point that we are slowly losing our ability to think. That got me thinking, on several recent events.
  • During the Lopkal bill debate on campus and even outside, I'm sure that less than 10%(even that is generous) people commenting on the issue would have read the bill and its competing versions, to form their own opinions. Yet, everyone and his uncle was commenting and liking Facebook status messages, and demonizing those who did not agree.
  • When asked to submit comment papers/letters on economic, legal, taxation and even public interest matters, the number of individual comment letters are quite few. This is sadly true even for professionals who do not take time out to critically analyze draft documents relating to THEIR work. 
  • The reading habit is dying, in favour of short spurts of concentrated entertainment.
  • During lectures at IIM-A and elsewhere, few people put in meaningful class participation. And even fewer have the temerity to seek clarification/question a Prof or a student presenter. This is true even for public seminars/talks/conferences.
Taken together, this trend is not an encouraging one. Thinking critically is not just for analysts, journalists or others but is for everyone, if they want to avoid being classes as sheeple. 

My ideal professional reference book

    After referring to many books for projects, MBA course work, CA/CMA preparation etc, I think I'm well equipped to comment to how an ideal reference book should be. Hardly 10% or fewer of books I've seen meet even 50%+ of this wishlist.Note that this does not cover books intended merely as textbooks only.
  1. Bridge the gap between theory and practice instead of leaning too much towards one side;-Some industry experts like Taleb critique nearly all academics, while most academics works do not refer much to practice. Hence, a book written by a professional with some academic background(to ensure proper referencing/language use) is often the middle way out.
  2. The 'inaccessible' material like quant stuff is contained in an appendix/online version. This is done successfully by John Hull's landmark book on Options, Futures and Other Derivatives. This reduces the printing cost, while allowing more detail to be put online.
  3. Spreadsheets/Simulations to practice the material, preferably with data also. This may be either on CD or downloadable/playable from webite. I've seen this in OM books.
  4. Downloadable data tables:- Instead of giving the data in PDF/text, how about being brave enough to give that same data(especially economic ones) as a supplement? That would let the student do some checking on his own as to the conclusions. 

Meet the true professionals.

During the past two months, I have interacted with several finance & other experts. While all of them are undoubtedly experts in their fields, few would qualify to be called professionals. And the reasons are manifold.
  1. Right from law firms, accountancy firms, medical practices etc, all have been tainted by the profit motive. Pro bono work is rare, and is given undue media coverage. 
  2.  Earlier the conception of a professional was that of a person who would have service motto as the driver, put clients first due to which profit would follow. But now, under the guise that clients are big boys who do not place reliance in them, investment banks have made a fine art of disclaiming any fiduciary responsibility. Clients have become counter-parties. 
  3. Under the guide of CRM/value based fees etc, clients who cannot pay much are relegated to the background, both quality and availability wise. Or those who work on those accounts view that as a punishment posting. 
  4. The unwritten social compact for professions was that in return for sacrificing some prime years in low paid public service(articleship, rural internship, clerkship), there would be material rewards later. But now, professional aspirants wish to avoid rural medical internship, do dummy articleship or go only for premier clerkships-and still they expect that same level of status/earnings. 
Show me a 'professional' who is content with 'grunt work' and low pay, and I'll show you a liar! But I met some professionals in every sense of the word, who make life better for everyone they meet. The unfortunately small list is below.
  1. Publications Counter guy at WIRC-ICAI:-This guy sits behind a counter and dispenses the ICAI books/material to those who want to buy them. But his job is not that easy. Navigating the byzantinere requests of often non English speaking people, he goes around his work with a smile
  2. Those helping with probono work:- Prashant Bhushan is an excellent example of this, irrespective of what his other motives may be. 

Anonymous blogs-the best way for industry professionals to share knowledge.

During my 2 month summer internship in the Singapore branch of a UK based investment bank, I tried my best to keep myself updated-besides 'on the job updation' of course! Word documents got filled with the notes I had made during my reading, work, leisure etc. But however much I tried, the process of converting rough outlines to blog posts was much harder than it seemed. Putting pen to paper is much easier than putting finger to keyboard! And the reasons are not far to seek. When a person is in the academic domain, he may not have the information explosion of the busy trader/structurer/research person but he has the benefits of

  1. No compliance limitations on what to write(eg-not on companies under live deals) and when to write(not during blackout periods etc)
  2. Lesser egg shells to tread on warily. When a professional writes(specially someone in industry compared to Big4) more so on controversial issues in variance with his employer's line, it does create awkwardness for everyone concerned. 
  3. No fear of divulging trade secrets-practioners must strike that fine balance between revealing enough to establish their reputation/evoke reader interest, but not so much as to lose competitive advantage.
Navigating these 3 limitations takes more time than it seems, For example, during my internship I had strong views on certain structured products. But voicing them openly on a public forum(a blog IS a public forum) would not have been the best thing, and would have been probably prohibited by some fine print nested away in that contract. Hence, those views will probably not see the light of day for quite some time.

An anonymous blog may still divulge 'trade secrets', but in the small world of finance, innovations rapidly spread through clients/pitch book forwarding/grapewine/new hires etc. So the risk of this is lower. An example of an anonymous blog is one on M&A/markets/finance in general( It is quite widely followed. 

The benefits of these blogs are that once the professional is willing to 'come out', he may be deluged with book deals, consulting requests or merely popularity. And for blogs with active commentators(unlike this one!), the author can also learn and refine his thinking. That is why even Seeking Alpha permits this.

Why Indian service businesses need tighter regulation

There was a time when a fool and his money were soon parted, but now it happens to everybody.
Adlai E. Stevenson

If you are a typical Indian, chances are that you have been hit by VAS charges for services you did not ask for, have called 'free entry' contest numbers @ Rs 10/minute, been levied bank charges for patently unfair situations, seen your general insurance(auto/mediclaim) claims contested to the last penny etc. And if you also an investor, then don't even get me started. The charlatans and cheats far outnumber the honest people(if there were any in the first place). While NSE did limit the extent to which the brokers could fleece the public, they found other mechanisms via power of attorney, unauthorized trades, PMS services etc.
Athithi Devo Bhava applies while serving expats from Indian BPOs. But when it comes to domestic service, then customer is the king-in the same way that a joker is the 'king' of the carnival-where everyone pokes fun at him explicitly or otherwise.

Thankfully, regulators(IRDA/SEBI/RBI/CCI/TRAI) are all waking up to this reality and are tightening their regulations to provide for SLA times, escalation procedures, penalties, opt out(do not call registry in telemarketing, explicit consent for levying VAS charges, banking fee prenotification etc).
But there is a lot more to be done in this space. And that is why I have no sympathies for Indian service providers when they bemoan the declining customer loyalty. They have dug their own graves.

Why no one wants to work in a factory anymore

Yesterday, I went to a well known synthetic fibres plant on the outskirts of Mumbai. This plant, owned by a premier Indian business group, had seen its haydays in the 80s. But now, with expansion planned elsewhere in India (Uttaranchal, Rajasthan etc), there's a recruitment freeze. New workers are taken on a paltry sum on contract basis, and made permanent after 5 yrs. No wonder then, that even a low paid worker wishes his children to do anything but follow in his foot steps.

Of course, people are still dying for work, and the 'no one' whom I refer to would be the English educated(not necessarily English speaking!), cosmopolitan metro living generation. A B.Sc prefers to work at Wipro rather than be a chemist at a factory. The pay differences are stark, but what is even more compelling is the sheer 'shame' of confessing to your friends that you work in a factory.

A friend of mine got placed at Asian Paints straight out of IIT JEE, and was desperately hoping for a change. Residing on the outskirts of Mumbai, he had little enthusiasm in telling all and sundry that he would be working at Bhandup/Ambernath. While his story had an happy ending(he got into one of India's best Bschools), this is not true for everyone.

Well intended policies,unintended consequences

  1. People are better educated, live longer and face a better quality of life
  2. Phrased this way, this is difficult to argue with these propositions. 
  3. But when thought of as
    1. Poorly educated unemployable students unwilling to get their hands dirty with 'real work', deferring joining the workforce for masters degrees of questionable value. 
    2. People living healthier life, consuming more food/resources AND facing income deficit in their old age, with more claimants on land. 
    3. Infrastructure encouraging more cars, higher fuel import/subsidy bill, pollution etc
  4. Then it would show how the healthcare, education & infrastructure boom may implode India
  5. Already, some signals of these consequences are apparent
    1. Farmers in the grain belt(Punjab/Haryana) incurred more wage cost due to competition from NREGA, so they suffered lesser yields AND higher costs, so now want a drastic hike in MSP, which will increase inflation, and in turn the inflation linked NREGA wage. Vicious cycle
    2. The war for minerals being played out in the poorest tribal areas, is partly due to this increase in resource demand, due to consumerism
      As one of those consumers in the above post(though better educated hopefully!), I cannot really condemn         this income levelling measure. All I can say is that if the consequences of some policies were thought out
     and debated as extensively as the Lokpal Bill is, these effects may have been reduced.  

Prof Anil Gupta-the true face of modern India.

Before joining IIM-A, I had heard about Prof Anil Gupta's yeoman work in the Honeybee network, Shodh Yatra and traditional knowledge. All these issues being related to 'rural India', I'm sorry to say that I imagined him as a do-gooder fuddy duddy, who espoused the traditional way of Indian life.

But when I got to know more about him(he has given 2 TED talks and takes 2 electives at IIM-A), I was quite stunned at his extent of tech savviness. Be it his Blackberry, netbook or extensive use of online databases, Prof Gupta really leverages technology to the fullest to achieve his objectives. And while others give lip service to open sourcing, Prof Gupta believes in using students/academic associates to the fullest to help his National Innovation Foundation, update course material, co author research etc.

And when you hear him speak or lecture, the extent of erudity is simply amazing. Not that other IIM-A faculty are any less, but simply he's in a different league altogether. Instead of launching into another anti West tirade, he backs up his arguments with logic and facts. And his philosophy to learning is more the Socratic way-that the students critically question their peer's presentations(instead of mutual back slapping).

So why do I annoint him the true face of modern India? As we immerse deeper into the modern technologies, the risk of losing touch with our traditional language, values, customs etc increases. But the ideal way is to use modern technologies to enrich the rich cultural heritage. For instance, Geodisic purchased the rights of the famous magazine Chandamama, and plans to leverage various platforms to fully monetize it. Likewise, Prof Gupta uses novel approach to keep traditional knowledge from dying, and straddles the new world and old India with equal ease. 

Beating the 'Knowing Doing Gap'

Action is the real measure of intelligence.
Napoleon Hill

The premise behind universal education, financial literacy and other forms of training is that if people know the right thing(or even what is considered as wrong), then they would ensure that the right things happen. But is it true? If it were, lesser people would be obese, addicts, procrastinators etc.  

In investing, this is especially relevant. In boom periods, investors readily succumb to herd mentality and irrational exuberance. But when the bust presents attractive buying opportunities, then they freeze and fall prey to analysis paralysis. The best laid plans fall apart, and they sit on the sidelines. Now, one way to defend is that one should not catch a falling knife by investing before the bottom. But given that markets tend to upward correct very rapidly, the chances of losing out on the rebound are more than being stung on the downward spiral. Of course, buying should be done only when the valuations are otherwise quite attractive. Some real life examples in the Indian context of these happening-at different times in the past 3 years
  • False rumours triggering crash:--ICICI Bank, Orchid Chemicals.
  • Stock trading to less than near cash value of investments:- Piramal Holdings
  • Dividend Yields > 8%;- Shipping Corporation, Ashok Leyland.
  • M&A concerns leading to steep fall;-Tata Motors, Ranbaxy, Patni
  • High grade debt at high yields:- Tata Steel/Tata Motors NCDs issued in 2009
James Montier and Dr Atul Gawande straddle different fields-investing and medicine-but both agree on the importance of a disciplined process. And that is where checklists and preset actions(buy orders, investor lockin periods, SIPs) help ensure action where it is justified rationally during normal periods, but where fear may stall it during burst.

In non financial contexts-losing weight, deaddiction etc-external support in form of counseling, support groups, family backing etc have been shown to help. But finally, will power and certain preset actions(charity to those one detests for breaking the 'knowing doing' gap, delayed gratification) carry the day.

Friday, September 16, 2011

Do process poor companies pay their people higher?

The title would seem quiet controversial and academic, so let me clarify my stance. I have empirically noticed that as the maturity of an industry improves, the average compensation falls. While this may be attributed to lower profits, the reason according to me is that as the process maturity goes up, the value added by the individual employee is lower. No wonder then, that organization stress 'process' and 'knowledge capture' and are wary of the lone ranger. Below are the examples I adduce in support of my theory
  • Investment banks and consulting firms are very profitable, but explicitly put their people over process, this increasing their dependence on stars. While retail banks/commercial  have refined their processes to such an extent that nobody is indispensable. This in my view is a contributory factor to differential pay.
  • New entrants in a market pay supernormal wages to lure established people from their competitors, to set up processes/systems. This is another form of substituting people for process in the short run. 
  • IT companies used to be the best paymasters in India till their process maturity attained stellar heights. And then they realized that they could easily find people to fit the process. Hence, expanding the talent poor(Wipro hiring B.Scs, training) became the option to offering huge salaries to poach. 
  • Market leaders(HUL, TAS, HDFC etc) are rarely the best paymasters. In fact, they deliberately benchmark themselves at lower than 100 percentile of industry pay, because they feel they are giving valuable training in return.  
This topic seems interesting enough to do a time series analysis-maybe it already has been done before. But the takeaway from this is that before career decisions, take this factor into account as well. 

Thursday, September 8, 2011

The vocabulary premium-how the digital words rewards command over keywords

The other day, I was reviewing the statistics of this(and others) blog of mine, and it struck me that the most popular posts were the ones with jargon/keywords(thus increasing the traffic from Google and other search engines). The reason for this was perhaps that those posts showed up prominently in the results of certain keywords.

Other non trivial examples of this in practice are
  • Journals insist on keywords for ease of indexing, but increasing with them going digital, these keywords are often most valuable to quickly locate the paper/article or to invite serendipity by browsing all content under a particular keyword. 
  • Google Advertising has a successful 'Ad Words' program where advertisers bid for the right to exhibit their relevant content alongside the search results for certain keywords. 
  • As the cybersquatting and legal domain name sale data shows, those who are creative enough to register popular domain names well in advance, can mint millions. 
  • Blogs have a special term for keywords as 'tags','categories' etc so that the blog visitors can see similar content grouped together. 
  • As veteran search engine users would have uncovered, an ounce of correct and comprehensive keywords can save a pound of laborious searching over hundreds of pages.  
  • For patent landscape analysis or corporate name search, one needs creativity and a good vocabulary for finding out 'simillar' categories and names.