I had the good fortune of meeting up with one of India’s finest film producer and director – Shekhar Kapur. Shekhar had come to my alma mater school – Kellogg School of Mgmt for an “India Day” event. While the other speakers were buoyant about India’s progress, Shekhar (while bullish) warned the audience that unless systemic issues like infrastructure, growing divide between the rich and poor, etc are not solved – sustaining progress would be tough.
During my chat with Shekhar he mentioned his latest project – Paani (which means water in Hindi). Paani (which is in the process of being made) is set in 2025 in a city polarised by water scarcity, a world divided into the haves and have-nots – those who have water and those who do not. Shekhar thinks that the next wars will be fought over water and not oil. As Global warming takes place, water will become the scarcest resource. Millions will die of thirst and countries will go to war to colonize the water resources – he indicated. People who know about the water challenges in India would understand the context.
The film is set in Mumbai. I am looking forward to the completion of this film by Shekhar. Visit Shekhar's blog on Paani to learn more about this.
http://www.shekharkapur.com/blog/archives/my_films/paani/
Thursday, July 31, 2008
Friday, February 15, 2008
Wayne Huizenga - the absolute deal maker
I just finished the audio version of the book – “The Making of a Blockbuster: How Wayne Huizenga Built a Sports and Entertainment Empire from Trash, Grit, and Videotape”. It is the story of Wayne Huizenga – probably the only person in history to have built 3 Fortune 1000 companies from scratch – Waste Management, Blockbuster and AutoNation. He also owns the Miami Dolphins and is the past owner of the Florida Marlins baseball team and the Panthers hockey team.
The book takes us thru Wayne’s journey of building Waste Management from a one-man shop to a mega empire thru tons of acquisitions. It showcases Wayne as a master deal maker. Wayne held fast to two rules: Don't loose a deal because you're not paying attention to it and never talk about it until it is done and in writing". Wayne is the ultimate deal maker, and the book demonstrates how he reached the highest levels of business success through intense hard work, and single minded determination and drive.
It also takes the reader thru Wayne’s intense negotiations with Sumner Redstone of Viacom. His passion was the service business. Blockbuster employees nicknamed him “Toilet Man” since he always used to inspect the bathrooms as he visited stores – if the bathrooms were not clean, it meant lack of attention or care for the customer.
It is a wonderful book that showcases the grit, determination and passion of a deal maker and a true business leader. Wayne is now 70 years old.
Saturday, February 9, 2008
How does the Fed pump money into the economy?
We hear on CNBC and read in financial journals that the “Fed is pumping money into the economy”. What does this mean? Does it mean the Fed works overtime and prints lot of currency? No, it does not work that way.
The Federal Reserve (Fed) has 3 methods to influence its monetary policy
i) Raise/Lower short-term interest rates
ii) Raise/Lower the amount of reserves that banks are required to hold
iii) Open Market Transactions
Short-term Interest Rates
When the economy is softening (current state), a rate cut improves things – since it makes things cheaper. On the other hand, if the economy is too strong, an interest rate cut slows down the economy.
Reserves
If the Fed asks banks to raise their reserves, it means banks need to hold on to more money which in turn reduces the money supply and thus tightens credit. When the Fed asks banks to lower their reserves, there is more money that the banks can lend.
Open Market Transactions
Open market transactions are measures by which the Fed controls the money supply by buying and selling government securities, or other financial instruments. Of the three, Open Market transactions have the most immediate effect on the economy. If the Fed wants to squeeze money from the system, it sells bonds from its account. This deducts the amount from the dealer (bank) thus draining money from the system. On the other hand, if the Fed wants to “pump money into the economy”, it will buy bonds and pay the bank that sold them. This money then flows thru the system and that is how the Fed increases money supply.
The Fed has been buying a ton of subprime mortgage bonds (since there were virtually no buyers for it) in light of the subprime crisis.
The Federal Reserve (Fed) has 3 methods to influence its monetary policy
i) Raise/Lower short-term interest rates
ii) Raise/Lower the amount of reserves that banks are required to hold
iii) Open Market Transactions
Short-term Interest Rates
When the economy is softening (current state), a rate cut improves things – since it makes things cheaper. On the other hand, if the economy is too strong, an interest rate cut slows down the economy.
Reserves
If the Fed asks banks to raise their reserves, it means banks need to hold on to more money which in turn reduces the money supply and thus tightens credit. When the Fed asks banks to lower their reserves, there is more money that the banks can lend.
Open Market Transactions
Open market transactions are measures by which the Fed controls the money supply by buying and selling government securities, or other financial instruments. Of the three, Open Market transactions have the most immediate effect on the economy. If the Fed wants to squeeze money from the system, it sells bonds from its account. This deducts the amount from the dealer (bank) thus draining money from the system. On the other hand, if the Fed wants to “pump money into the economy”, it will buy bonds and pay the bank that sold them. This money then flows thru the system and that is how the Fed increases money supply.
The Fed has been buying a ton of subprime mortgage bonds (since there were virtually no buyers for it) in light of the subprime crisis.
Wednesday, February 6, 2008
Confessions of a Wall Street Analyst
I just read the book “Confessions of a Wall Street Analyst” by Dan Reingold. Dan was the superstar telecom analyst on Wall Street in the 1990’s. He tracks the “unplanned” journey from MCI to becoming a star analyst on Wall Street. Dan takes us thru the fast-paced life of an analyst traveling across the globe and responding to investors/customers around the clock with no respite. It takes us inside the firms like – Morgan Stanley, Merrill Lynch, and Credit Suisse First Bank.
He describes the (shady) dealings of Global Crossing and WorldCom – the failed telecom companies. The book focuses on his intense rivalry and fight with arch nemesis – security analyst Jack Grubman. It outlines their competition to get on top of the list of the “Institutional Investor” – which is considered the bible for rating Wall Street analysts. Jack was eventually banned for life from the securities industry.
It is a good read – albeit you get to hear just Dan’s side of the story. Will Jack write a book outlining his side of the story? We will have to wait and see.
He describes the (shady) dealings of Global Crossing and WorldCom – the failed telecom companies. The book focuses on his intense rivalry and fight with arch nemesis – security analyst Jack Grubman. It outlines their competition to get on top of the list of the “Institutional Investor” – which is considered the bible for rating Wall Street analysts. Jack was eventually banned for life from the securities industry.
It is a good read – albeit you get to hear just Dan’s side of the story. Will Jack write a book outlining his side of the story? We will have to wait and see.
Sunday, January 27, 2008
Cutthroat competition
I just read “The Running of the Bulls – Inside the cutthroat race from Wharton to Wall Street”. It is a fascinating book by Nicole Ridgway (now Senior Editor of SmartMoney) – that describes the life of an undergraduate at Wharton (arguably the best undergrad program in the US for finance). It outlines the intense competition, drive and hunger of the students in their 4 years at the school. The book takes us through the experiences of 6 students – as they go thru brutal interviews for the 10 week summer internship. Students work 100-120 hours seven days a week at firms like Goldman Sachs, Lazard Feres, Citigroup, McKinsey, General Mills, etc – just to keep up. The author then takes us into the interview process (case studies, quantitative technical questions, situational interviews, etc) with the jobs they land after graduation.
The author has selected the 6 students with enough diversity that their stories do not seem monotonous. One of them is Shreevar Kheruka (whose family owns Borosil group) - from my hometown, Bombay. It is an easy read that is sure to take you back to your school/college days.
The book also mentions Kellogg alum and the superstar of Lazard Feres - Gary Parr (Deputy Chairman). It outlines Gary mentoring one of the 6 students. Gary helped broker the $58 billion transaction that merged JP Morgan Chase with Bank One.
The author has selected the 6 students with enough diversity that their stories do not seem monotonous. One of them is Shreevar Kheruka (whose family owns Borosil group) - from my hometown, Bombay. It is an easy read that is sure to take you back to your school/college days.
The book also mentions Kellogg alum and the superstar of Lazard Feres - Gary Parr (Deputy Chairman). It outlines Gary mentoring one of the 6 students. Gary helped broker the $58 billion transaction that merged JP Morgan Chase with Bank One.
Friday, January 18, 2008
What does a Chief Strategy Officer do?
Recently, my friend Rohit Shyam joined Accelrys as their Chief Strategy Officer (CSO). This is a newer C-level title that is catching up in many companies. Traditionally, the CEO is responsible for strategy and company direction while the COO is in charge of operations. So, what does the CSO do?
From the title, one would think that the CSO is responsible for formulating strategy. That would be a very incomplete and misleading definition. In a recent issue of the Harvard Business Review, authors R. Timothy S. Breene, Paul F. Nunes, Walter E. Shill outline the CSO role in greater detail. For starters, the CSO role is not just a “(strategy) thinking” job. In fact execution is an integral part of this role. Typically, the CEO is bogged down by the ever growing complexity of the global business environment – political, regulatory, economic, shareholder and other stakeholder challenges. Add to that the pressure to deliver results at an ever increasing pace. Clearly, with all this pressure, it becomes tough for a CEO to ensure strategy refinement and execution.
That is the reason more and more CEO’s are hiring CSO’s – to help them with refinement and execution of strategy. The CSO typically reports to the CEO. The CSO is tasked with creating, communicating, executing, and sustaining a company's strategic initiatives. The CSO is not just a thinking/dreaming strategist; in fact they consider themselves as doers.
They help set and refine the strategy. Furthermore, they ensure that different departments/organizations within the company understand their role in the strategic plan and how it connects with the overall objectives. They also drive change across the company – to ensure the different arms of the organization march in tandem. Finally, the CSO validates the decisions made by the various departments to ensure alignment with company strategy. CSO’s help steer the top team away from groupthink and from focusing too much on past practices and accomplishments.
CSO’s are seasoned executives who have held P&L responsibilities and have had significant operational experience. Most importantly, a good CSO candidate should be: deeply trusted by the CEO, a master of multitasking and a jack of all trades, a star player, and a doer, not just a thinker. The CSO role is an apt successor to the CEO – since they get involved in almost all parts of the business. Having a CSO is no longer a luxury for a CEO – it is becoming mandatory to have a strong CSO in order for CEO’s to perform their job well. The COO role does not go away. They are still critical but their focus is on day-to-day tactics and operations.
I am very thankful to Rohit for clarifying the role of the CSO. I wish him only the very best in this new venture.
Sunday, January 13, 2008
Technology spending in 2008
Analysts across the board are predicting lower technology spending in 2008 compared to the previous year. IDC expects technology spending in the US to grow by 3-4% (softer than 6.6% in 2007). Gartner projects US technology spending to grow by 5.7 % (compared to 6.1%).Forrester expects the U.S. market to grow 4.6 percent, down from 5.4 percent last year.
Other than the different specific numbers, the consensus is that technology spending in 2008 will be lower than 2007. The credit crisis, subprime ripple effects and rising oil prices have not helped matters. When credit tightens, the first thing that takes a hit is capital spending and technology spending. Star (technology research) analyst - Laura Conigliaro at Goldman Sachs advised her clients that IT spending is less than comforting.
However, there is consensus that vendors that focus on developing economies in 2008 will reap benefits. IT purchases among countries in the Asia-Pacific region is expect to hit $535 billion next year, up 14%, following a 19% rise in 2007, says Forrester. The United States remains the biggest buyer of IT by far, at a projected $533 billion this year. China, which spent $117 billion this year, will surpass Japan, which spent $173 billion, as the second-biggest consumer of IT within a few years, Forrester predicts.
The major areas that firms will spend money - maintenance and upgrades. Since spending is going to be softer, cost saving initiatives will be looked at positively. We could see increased outsourcing contracts based on cost reductions and strong ROI models. Server Virtualization (VMWare,etc) will be another area that companies will look to spend money – to run their data centers effectively.
There is debate on the impact on SaaS firms. SaaS firms argue that since they do not require massive capex, it should be popular in a soft economy. On the other hand, MGI Research states that SaaS vendors will be hit harder if the economy heads downward than vendors licensing software in the traditional mode. SaaS vendors have more infrastructure costs to bear, and businesses will lower the number of subscribed employees if a poor economy stretches beyond nine months, MGI predicts.
MGI states that in a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats. Not that on-premise software vendors have it easy. SaaS vendors have challenges due to the heavy infrastructure burden. Also, in an enterprise model, the user provides first level of support, but in a SaaS model, most (if not all) support is provided by the SaaS vendor.
Net/net – Technology spending will be lower in 2008. Whether it is an on-premise software or SaaS, both will face its own set of challenges. Vendors will need to be creative to make the most of the soft spending. Emerging areas like SOA and virtualization are good bets. There will be a lot of focus on cost savings (read outsourcing). Upgrades are another prime area. Firms would do well to look (expand) overseas instead of just looking within the United States. Expanding into growing economies like China and India would be beneficial (see my blog on the Chinese currency appreciation at http://sunnykumar108.blogspot.com/2007/12/chinese-currency-appreciation-issue.html)
Other than the different specific numbers, the consensus is that technology spending in 2008 will be lower than 2007. The credit crisis, subprime ripple effects and rising oil prices have not helped matters. When credit tightens, the first thing that takes a hit is capital spending and technology spending. Star (technology research) analyst - Laura Conigliaro at Goldman Sachs advised her clients that IT spending is less than comforting.
However, there is consensus that vendors that focus on developing economies in 2008 will reap benefits. IT purchases among countries in the Asia-Pacific region is expect to hit $535 billion next year, up 14%, following a 19% rise in 2007, says Forrester. The United States remains the biggest buyer of IT by far, at a projected $533 billion this year. China, which spent $117 billion this year, will surpass Japan, which spent $173 billion, as the second-biggest consumer of IT within a few years, Forrester predicts.
The major areas that firms will spend money - maintenance and upgrades. Since spending is going to be softer, cost saving initiatives will be looked at positively. We could see increased outsourcing contracts based on cost reductions and strong ROI models. Server Virtualization (VMWare,etc) will be another area that companies will look to spend money – to run their data centers effectively.
There is debate on the impact on SaaS firms. SaaS firms argue that since they do not require massive capex, it should be popular in a soft economy. On the other hand, MGI Research states that SaaS vendors will be hit harder if the economy heads downward than vendors licensing software in the traditional mode. SaaS vendors have more infrastructure costs to bear, and businesses will lower the number of subscribed employees if a poor economy stretches beyond nine months, MGI predicts.
MGI states that in a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats. Not that on-premise software vendors have it easy. SaaS vendors have challenges due to the heavy infrastructure burden. Also, in an enterprise model, the user provides first level of support, but in a SaaS model, most (if not all) support is provided by the SaaS vendor.
Net/net – Technology spending will be lower in 2008. Whether it is an on-premise software or SaaS, both will face its own set of challenges. Vendors will need to be creative to make the most of the soft spending. Emerging areas like SOA and virtualization are good bets. There will be a lot of focus on cost savings (read outsourcing). Upgrades are another prime area. Firms would do well to look (expand) overseas instead of just looking within the United States. Expanding into growing economies like China and India would be beneficial (see my blog on the Chinese currency appreciation at http://sunnykumar108.blogspot.com/2007/12/chinese-currency-appreciation-issue.html)
Sunday, January 6, 2008
Do price limits behave like magnets?
I was reading a paper that was published by my friend Purnendu Nath (PhD Finance - London Business School). The paper is titled “Do price limits behave like magnets?”
Many major stock and commodities exchanges have instituted procedures to limit mass selling in times of serious market declines or irrational bull runs in a single day. These mechanisms include Circuit Breakers, the Collar Rule, and Price Limits. Circuit Breakers establish whether trading will be halted temporarily or stopped entirely. The Collar Rule and Price Limits affect the way trading takes place. In price limits, the exchange places restrictions on upper and lower limits (e.g. plus or minus 10% of the previous day’s closing price). Trading does not stop when the price limit is reached, however trades must take place within the specific range. The main reason for price limits is to ensure prices do not drop or increase dramatically in a single day.
For his paper, Purnendu collected tick data from the National Stock Exchange of India (NSE) – over 110 million trades in a 14 month period. He proves using empirical analysis that price limit does not suck in prices in its neighborhood. In other words, the price varies across the band and is not necessarily attracted to the upper/lower limit.
He also shows that price limits do not always cause acceleration in trading. Using regression and statistical analysis, he shows that for upper price limits there seems to be a reduction in trading activity as a stock approaches its limit price. For lower price limits, there is acceleration as a stock approaches the limit. However, it cannot be concluded that the existence of a lower price limit causes the acceleration in trading. That falling prices evoke fear and induce panic related trading is a possibility that is also confirmed by examining the extent of trading at the limit prices.
Price limits do have benefits. They do prevent stock market overreaction and do not necessarily cause it.
In the United States, the SEC has institutionalized price limits in the “futures” market.
Nice work, Purnendu!!!!
Many major stock and commodities exchanges have instituted procedures to limit mass selling in times of serious market declines or irrational bull runs in a single day. These mechanisms include Circuit Breakers, the Collar Rule, and Price Limits. Circuit Breakers establish whether trading will be halted temporarily or stopped entirely. The Collar Rule and Price Limits affect the way trading takes place. In price limits, the exchange places restrictions on upper and lower limits (e.g. plus or minus 10% of the previous day’s closing price). Trading does not stop when the price limit is reached, however trades must take place within the specific range. The main reason for price limits is to ensure prices do not drop or increase dramatically in a single day.
For his paper, Purnendu collected tick data from the National Stock Exchange of India (NSE) – over 110 million trades in a 14 month period. He proves using empirical analysis that price limit does not suck in prices in its neighborhood. In other words, the price varies across the band and is not necessarily attracted to the upper/lower limit.
He also shows that price limits do not always cause acceleration in trading. Using regression and statistical analysis, he shows that for upper price limits there seems to be a reduction in trading activity as a stock approaches its limit price. For lower price limits, there is acceleration as a stock approaches the limit. However, it cannot be concluded that the existence of a lower price limit causes the acceleration in trading. That falling prices evoke fear and induce panic related trading is a possibility that is also confirmed by examining the extent of trading at the limit prices.
Price limits do have benefits. They do prevent stock market overreaction and do not necessarily cause it.
In the United States, the SEC has institutionalized price limits in the “futures” market.
Nice work, Purnendu!!!!
Friday, January 4, 2008
Goldman Sachs – How they did it?
Goldman in comparison with its peers
Wall Street firms like Citigroup, Bear Stearns, Morgan Stanley, Merrill Lynch and others are struggling and bleeding – due to the drastic impact of the recent subprime and credit problems. The top executives lost their jobs and were kicked out in despair by their Boards and investor.
Now, consider this in contrast – On Dec 18 2007, Goldman Sachs reported excellent positive results. It is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. Goldman's annual profits were up 22% to $11.6bn. The bank's 30,000 staff will share a compensation pool of $20.1bn - amounting to $600,000 each if it was divided up equally (which, obviously, it won't be). Goldman CEO Lloyd Blankfein will take home approx $70 million this year compared to $54 million last year.
Wow – incredible!!!! How did they do it?
Wall Street firms like Citigroup, Bear Stearns, Morgan Stanley, Merrill Lynch and others are struggling and bleeding – due to the drastic impact of the recent subprime and credit problems. The top executives lost their jobs and were kicked out in despair by their Boards and investor.
Now, consider this in contrast – On Dec 18 2007, Goldman Sachs reported excellent positive results. It is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. Goldman's annual profits were up 22% to $11.6bn. The bank's 30,000 staff will share a compensation pool of $20.1bn - amounting to $600,000 each if it was divided up equally (which, obviously, it won't be). Goldman CEO Lloyd Blankfein will take home approx $70 million this year compared to $54 million last year.
Wow – incredible!!!! How did they do it?
How did Goldman manage to avoid the downslide?
Goldman has avoided the worst of the mortgage mayhem in the US by making an inspired bet that there would be a huge rise in loan defaults among higher-risk homebuyers in the US. Last year, when the mortgage markets were still riding high, they decided to reduce their holdings and take out hedges against losses, going directly against most of their rivals, who continued to fill their boots.
According to The Wall Street Journal, taking that position generated nearly $4 billion of profits during the year ended Nov. 30. This decision did not necessarily come from the top. Instead, it came from 2 traders of a very small division (superstar traders Michael Swenson and Josh Birnbaum) of the bank. Michael and Josh pushed their belief and convinced senior management to take this strategy.
Is that the complete story?
But wait – this is not the complete story. On the one hand, they took a short position. But on the other hand, Goldman Sachs took part in issuing, packaging, slicing, and selling bundles of asset-backed debt during the past several years, charging multimillion-dollar fees to its clients (who lost a bunch of money).
Critics accuse Goldman of not being careful with their clients’ money and not advising clients to take the same bets they (Goldman) made. I do not think that this was a planned conspiracy as it looks in hindsight. They hedged their bets wisely – and made commissions out of an instrument that was in high demand. Yes – they had a double whammy – they made money on commissions as well as by shorting. Goldman has once again proved – why it is the “crème de la crème” of investment banking.
Some notable Goldman alumni – Jim Cramer (Mad Money), Eddie Lampert (K-Mart, Sears), Robert Rubin (Chairman of Citigroup), Joshua Bolten (White House Chief of Staff).
This story certainly depicts the impact of contrarian thinking. I am sure Michael and Josh got a very nice bonus check and a lot of thank you notes from their bosses!!!!! What are they up to next?
According to The Wall Street Journal, taking that position generated nearly $4 billion of profits during the year ended Nov. 30. This decision did not necessarily come from the top. Instead, it came from 2 traders of a very small division (superstar traders Michael Swenson and Josh Birnbaum) of the bank. Michael and Josh pushed their belief and convinced senior management to take this strategy.
Is that the complete story?
But wait – this is not the complete story. On the one hand, they took a short position. But on the other hand, Goldman Sachs took part in issuing, packaging, slicing, and selling bundles of asset-backed debt during the past several years, charging multimillion-dollar fees to its clients (who lost a bunch of money).
Critics accuse Goldman of not being careful with their clients’ money and not advising clients to take the same bets they (Goldman) made. I do not think that this was a planned conspiracy as it looks in hindsight. They hedged their bets wisely – and made commissions out of an instrument that was in high demand. Yes – they had a double whammy – they made money on commissions as well as by shorting. Goldman has once again proved – why it is the “crème de la crème” of investment banking.
Some notable Goldman alumni – Jim Cramer (Mad Money), Eddie Lampert (K-Mart, Sears), Robert Rubin (Chairman of Citigroup), Joshua Bolten (White House Chief of Staff).
This story certainly depicts the impact of contrarian thinking. I am sure Michael and Josh got a very nice bonus check and a lot of thank you notes from their bosses!!!!! What are they up to next?
Tuesday, January 1, 2008
Can we predict the future (Deming, Taleb & The Law of Karma)?
Dr William Edwards Deming
Dr William Edwards Deming is known as the father of the Japanese post-war industrial revival and was regarded by many as the leading quality guru in the United States. He was invited to Japan at the end of World War II by Japanese industrial leaders and engineers. They asked Dr. Deming how long it would take to shift the perception of the world from the existing paradigm that Japan produced cheap, shoddy imitations to one of producing innovative quality products.
Dr. Deming told the group that if they would follow his directions, they could achieve the desired outcome in five years. Few of the leaders believed him. But they were ashamed to say so and would be embarrassed if they failed to follow his suggestions. As Dr. Deming mentioned, "They surprised me and did it in four years". For his efforts he was awarded the Second Order of the Sacred Treasure by the former Emperor Hirohito.
Dr Deming used to say “The most important things are unknown or unknowable". The factors that have the greatest impact, long term, can be quite surprising. Analogous to an earthquake that disrupts service, other "earth-shattering" events that most affect an organization will be unknown or unknowable, in advance. Other examples of important things would be: a drastic change in technology, or new investment capital.
The Black Swan – Nassim Taleb
Nassim Taleb is the author of the book "Black Swan" that discusses the massive and pervasive impact of highly improbable event. Taleb was a pioneer of complex financial derivatives and was a senior trader at Wall Street. Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event. For hundreds of years, it was accepted that the color of swans was white. However, in the 17th century, swans with black color were discovered in Australia - thus the name "Black Swan" - that denotes an improbable event that no one had predicted but came to pass.
Taleb claims that almost all consequential events in history come from the unexpected - while humans convince themselves that these events are explainable in hindsight. He argues that forecasting methods (statistics, fractals, power law, etc) have not been able to predict major events. By just focusing on past events (to predict the future), we tend to ignore other possibilities.
A black swan is an outlier, an event that lies beyond the realm of normal expectations. How would an understanding of the world on June 27, 1914, have helped anyone guess what was to happen next? The rise of Hitler, the demise of the Soviet bloc, the spread of Islamic fundamentalism, the Internet bubble, 9/11: not only were these events unpredictable, but anyone who correctly forecast any of them would have been deemed a lunatic (indeed, some were).
Law of Karma
In contrast to the randomness that Taleb talks about, the Hindus subscribe to the “Law of Karma”. The effects of all deeds actively create past, present and future experiences, thus making one responsible for one's own life, and the pain and joy it brings to others. Karma extends through past life, this lifetime and future lives. The net effect is that you sow what you reap (except that there is a time-lag (that sometimes spans lifetimes) between action and result).
In Conclusion
Hence, the recommendation for us is to keep an open mind and be open to idea that you may not be always able to forecast correctly. The "Black Swan" may be right under your nose and you might miss it completely!!!! In that sense, Deming and Taleb are saying the same thing - be open to the impossible and do not necessarily look to history to predict the future. The past does not necessarily equal or point to the future.
Dr William Edwards Deming is known as the father of the Japanese post-war industrial revival and was regarded by many as the leading quality guru in the United States. He was invited to Japan at the end of World War II by Japanese industrial leaders and engineers. They asked Dr. Deming how long it would take to shift the perception of the world from the existing paradigm that Japan produced cheap, shoddy imitations to one of producing innovative quality products.
Dr. Deming told the group that if they would follow his directions, they could achieve the desired outcome in five years. Few of the leaders believed him. But they were ashamed to say so and would be embarrassed if they failed to follow his suggestions. As Dr. Deming mentioned, "They surprised me and did it in four years". For his efforts he was awarded the Second Order of the Sacred Treasure by the former Emperor Hirohito.
Dr Deming used to say “The most important things are unknown or unknowable". The factors that have the greatest impact, long term, can be quite surprising. Analogous to an earthquake that disrupts service, other "earth-shattering" events that most affect an organization will be unknown or unknowable, in advance. Other examples of important things would be: a drastic change in technology, or new investment capital.
The Black Swan – Nassim Taleb
Nassim Taleb is the author of the book "Black Swan" that discusses the massive and pervasive impact of highly improbable event. Taleb was a pioneer of complex financial derivatives and was a senior trader at Wall Street. Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event. For hundreds of years, it was accepted that the color of swans was white. However, in the 17th century, swans with black color were discovered in Australia - thus the name "Black Swan" - that denotes an improbable event that no one had predicted but came to pass.
Taleb claims that almost all consequential events in history come from the unexpected - while humans convince themselves that these events are explainable in hindsight. He argues that forecasting methods (statistics, fractals, power law, etc) have not been able to predict major events. By just focusing on past events (to predict the future), we tend to ignore other possibilities.
A black swan is an outlier, an event that lies beyond the realm of normal expectations. How would an understanding of the world on June 27, 1914, have helped anyone guess what was to happen next? The rise of Hitler, the demise of the Soviet bloc, the spread of Islamic fundamentalism, the Internet bubble, 9/11: not only were these events unpredictable, but anyone who correctly forecast any of them would have been deemed a lunatic (indeed, some were).
Law of Karma
In contrast to the randomness that Taleb talks about, the Hindus subscribe to the “Law of Karma”. The effects of all deeds actively create past, present and future experiences, thus making one responsible for one's own life, and the pain and joy it brings to others. Karma extends through past life, this lifetime and future lives. The net effect is that you sow what you reap (except that there is a time-lag (that sometimes spans lifetimes) between action and result).
In Conclusion
Hence, the recommendation for us is to keep an open mind and be open to idea that you may not be always able to forecast correctly. The "Black Swan" may be right under your nose and you might miss it completely!!!! In that sense, Deming and Taleb are saying the same thing - be open to the impossible and do not necessarily look to history to predict the future. The past does not necessarily equal or point to the future.
Tough times for Private Equity & LBO funds
In financial markets there is something known as the Bigger (Greater) Fool Theory. It means that “buy a stock and you'll make money as long as some other fool is willing to buy the stock from you at a higher price in order to sell it to an even bigger fool at an even higher price." (Crash, Arbel & Kaff). Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in price due to the selloff.
The Bigger Fool Theory might be in play with respect to the Private Equity and LBO funds. The Blackstone Group, the private-equity powerhouse lead by Stephen Schwarzman, has lost a quarter of its value since it went public in June. Fortress Investment Group, a diversified alternative asset management company, and Och-Ziff Capital Management, a hedge fund run by Daniel Och, a former Goldman Sachs trader, have also stumbled following initial public offerings.
The tightening credit squeeze has sent the buyout industry into a funk and left some hedge funds with steep losses. Kohlberg Kravis Roberts (KKR), which invented the modern buyout industry, is now struggling to get its own IPO off the ground. AQR Capital Management, a $38 billion hedge fund, has put its plans for an offering on hold. Citigroup, which helped take Och-Ziff public in November, recently warned that the firm was likely to face headwinds for the foreseeable future.
The ongoing issues with the financial markets is certainly hurting Private Equity and LBO funds. However, like everything else, it will bounce back. Will a bigger fool come and save the day?
The Bigger Fool Theory might be in play with respect to the Private Equity and LBO funds. The Blackstone Group, the private-equity powerhouse lead by Stephen Schwarzman, has lost a quarter of its value since it went public in June. Fortress Investment Group, a diversified alternative asset management company, and Och-Ziff Capital Management, a hedge fund run by Daniel Och, a former Goldman Sachs trader, have also stumbled following initial public offerings.
The tightening credit squeeze has sent the buyout industry into a funk and left some hedge funds with steep losses. Kohlberg Kravis Roberts (KKR), which invented the modern buyout industry, is now struggling to get its own IPO off the ground. AQR Capital Management, a $38 billion hedge fund, has put its plans for an offering on hold. Citigroup, which helped take Och-Ziff public in November, recently warned that the firm was likely to face headwinds for the foreseeable future.
The ongoing issues with the financial markets is certainly hurting Private Equity and LBO funds. However, like everything else, it will bounce back. Will a bigger fool come and save the day?
Monday, December 31, 2007
The Chinese currency (appreciation) issue
On July 21 2005, China announced that its currency (renminbi/yuan) will no longer be pegged to the US dollar. The exchange rate on that day was 8.11 yuan to a dollar. On Dec 31 2007, the exchange rate was 7.3 yuan to a dollar. Thus, the yuan appreciated about 11% in two and a half years. The yuan rose about 1% just this week alone.
But the United States and other trading partners are still pushing for a faster rise, saying a weak yuan is contributing to China's bulging trade surplus by making Chinese exports cheaper and more competitive.
The strong yuan causes potential problems for the Chinese exporters – since it will cost more for the (US/external) importers. However, a strong yuan (by letting in more imports at a cheaper price) keeps down inflation. However, the Consumer Price Index (CPI) was about 7% higher than last year. Thus the rising inflation makes it much easier for the Chinese government to accept a stronger yuan.
However, the Chinese exporters do not like the strong yuan. Local politicians are also concerned about social issues if the exporters start laying off workers due to hit on margins.
Meanwhile China’s central bank governor Zhou Xiaochuan has stated that he will implement a tight monetary policy in 2008 using a range of tools to keep a check on liquidity. The central bank has increased interest rate 6 times in 2007 to check excess liquidity and inflation.
It will be interesting to see the Chinese dance on holding/appreciation of the yuan. They will do well to avoid the case of “Dutch disease”. The term “Dutch disease” was coined in 1977 by the Economist and it refers to episodes where large inflows of foreign exchange—usually as a result of the discovery of natural resources or massive foreign investment—leads to appreciation of the currency, undermining a country's traditional export industries. ("Dutch disease" originally referred to the adverse impact of the discovery of natural-gas deposits in the Netherlands on that country's manufacturing exports).
India is also in a similar situation with respect to the appreciation of its currency (Rupee). A report released by Goldman Sachs states that the appreciation in rupee will continue to put a downward pressure on inflation, which is forecast to stay around 4.4 per cent in 2008. Let’s see how the 2 countries deal with the currency issue (appreciation) in 2008.
But the United States and other trading partners are still pushing for a faster rise, saying a weak yuan is contributing to China's bulging trade surplus by making Chinese exports cheaper and more competitive.
The strong yuan causes potential problems for the Chinese exporters – since it will cost more for the (US/external) importers. However, a strong yuan (by letting in more imports at a cheaper price) keeps down inflation. However, the Consumer Price Index (CPI) was about 7% higher than last year. Thus the rising inflation makes it much easier for the Chinese government to accept a stronger yuan.
However, the Chinese exporters do not like the strong yuan. Local politicians are also concerned about social issues if the exporters start laying off workers due to hit on margins.
Meanwhile China’s central bank governor Zhou Xiaochuan has stated that he will implement a tight monetary policy in 2008 using a range of tools to keep a check on liquidity. The central bank has increased interest rate 6 times in 2007 to check excess liquidity and inflation.
It will be interesting to see the Chinese dance on holding/appreciation of the yuan. They will do well to avoid the case of “Dutch disease”. The term “Dutch disease” was coined in 1977 by the Economist and it refers to episodes where large inflows of foreign exchange—usually as a result of the discovery of natural resources or massive foreign investment—leads to appreciation of the currency, undermining a country's traditional export industries. ("Dutch disease" originally referred to the adverse impact of the discovery of natural-gas deposits in the Netherlands on that country's manufacturing exports).
India is also in a similar situation with respect to the appreciation of its currency (Rupee). A report released by Goldman Sachs states that the appreciation in rupee will continue to put a downward pressure on inflation, which is forecast to stay around 4.4 per cent in 2008. Let’s see how the 2 countries deal with the currency issue (appreciation) in 2008.
Sunday, December 30, 2007
(Lack of) Branding among Asian companies
Consider this – Asia comprises of 4 billion people which is about 60% of the world population. On an average, the Asian economy is growing at 8% as compared the 3% in the United States & Europe. Over the last 25 years, the high-tech exports of the United States dropped from 31% to 18% while exports from the Asian countries increased from 7% to 25%.
However, if you look at the top 100 global brands, only 11 Asian companies find a spot (per Interbrand and BusinessWeek ratings) (Toyota at #7 was the top ranked Asian company). Professor Amitava Chattopadhyay of INSEAD(see footnote) says that history explains part of that reason. Historically, the wealthy folks in the Asian countries went for higher studies to Western Countries and flaunted Western brands. Relatively speaking, it is only in recent years that local Asian brands have had respectability and some semblance of parity with their Western counterparts.
Traditionally, branding has received step motherly treatment within Asia. He states that Asian companies have traditionally focused on operations, technology and manufacturing but have not spent enough attention on marketing. But now Asia has achieved critical mass – due to economic growth, availability of disposable income and creation of a larger consumer class.
The companies need to instill the brand values and meaning within its employees and also engage in educating the outside ecosystem (consumers, suppliers, partners, etc). Another example is that if you look at the website of a Western (Europe, United States) company, they provide the bios of their executive management team. However, in contrast (till a few years ago) many Asian companies used to shy away from providing detailed bios of their management team. Not sure why? This is changing now, but companies need to celebrate and highlight the strength of their management team. Another positive change is that (large) family run businesses are now getting in professional management into their companies.
However, getting to be the top brand will not be an easy challenge – since historically consumers have held Western brands in high esteem. The Asian challengers will need to make a concerted effort to claim a spot at the top.
INSEAD (pronounced IN-SEE-ADD) is a leading graduate business school and research institution with campuses in Fontainebleau (near Paris), France and in Singapore. In 2006, an INSEAD Executive Education centre was inaugurated in Abu Dhabi.
Friday, December 28, 2007
Should you fire your worst customer(s)?
Conventional wisdom reminded us “The customer is always right”. Companies went to great lengths to placate customers and bent over backwards to achieve high customer satisfaction scores.
Then, in the 1990’s the science of CRM (Customer Relationship Management) highlighted the differentiation (of cost vs. revenue) across different customer sections (via customer segmentation). CRM depicted clearly how different customer segments had varied costs (to serve) and revenues – which were not necessarily proportional. While this was probably known at an abstract level, CRM provided tools and techniques to measure the cost to serve a particular customer segment as well as the corresponding revenues.
This led to the realization that the lowest value customer(s) were at times very expensive to serve. The cost to serve them far outweighed the benefits and sometimes they would drain the company’s scare resources. This caused companies to look carefully on whether they should keep or fire those customers. Recently, Sprint fired a small section of its customers who were disproportionately calling customer service.
Read this letter that Sprint sent out in June 2007 firing low-value (high-nuisance) customers
http://www.gadgetell.com/images/2007/07/sprint_dear_john_425.jpg
Brad Anderson, CEO of Best Buy publicly stated that he wanted to separate the “angels” among his 1.5 million daily customers from the ‘devils”.
However, recent research by Professors at the Wharton School arrives at a different point of view. They argue via empirical (market) data and theoretical models (applied game theory, Nash equilibrium) that firing customers may not necessarily be a good idea. They state that firing low-value customers may actually decrease firm profits and that trying to increase the value of these customers may be counterproductive. This is a certainly a contrarian view.
However, they do agree that companies need to provide differentiated service to various customer segments (e.g. provide high-touch to high-value customers). They do agree with the concept of Customer Value Management (CVM) – to maximize the lifetime profitability of your customer base. They say that if you fire your low-value customers, it provides competitors with an easy target (to go after your existing customers who they know are high-value customers). They say that if you make low-value customers more valuable, this can also be counter-productive because it also encourages your competitors to poach more intensely.
Their research states that the optimal solution is to keep the high-end customers and at the same time keep the low-value customer but find cheaper, better ways to manage them (self service, etc). You have to keep your competition confused about who your good and bad customers are.
I agree that there is a case to be made for firing low-value customers. However, this new research does offer a strong point of view – to NOT fire low-value customers. This is especially true in a highly competitive market – where firms are on the lookout to poach customers. So, the next time your boss asks you to fire a low-value customer – do consider this contrarian view.
Then, in the 1990’s the science of CRM (Customer Relationship Management) highlighted the differentiation (of cost vs. revenue) across different customer sections (via customer segmentation). CRM depicted clearly how different customer segments had varied costs (to serve) and revenues – which were not necessarily proportional. While this was probably known at an abstract level, CRM provided tools and techniques to measure the cost to serve a particular customer segment as well as the corresponding revenues.
This led to the realization that the lowest value customer(s) were at times very expensive to serve. The cost to serve them far outweighed the benefits and sometimes they would drain the company’s scare resources. This caused companies to look carefully on whether they should keep or fire those customers. Recently, Sprint fired a small section of its customers who were disproportionately calling customer service.
Read this letter that Sprint sent out in June 2007 firing low-value (high-nuisance) customers
http://www.gadgetell.com/images/2007/07/sprint_dear_john_425.jpg
Brad Anderson, CEO of Best Buy publicly stated that he wanted to separate the “angels” among his 1.5 million daily customers from the ‘devils”.
However, recent research by Professors at the Wharton School arrives at a different point of view. They argue via empirical (market) data and theoretical models (applied game theory, Nash equilibrium) that firing customers may not necessarily be a good idea. They state that firing low-value customers may actually decrease firm profits and that trying to increase the value of these customers may be counterproductive. This is a certainly a contrarian view.
However, they do agree that companies need to provide differentiated service to various customer segments (e.g. provide high-touch to high-value customers). They do agree with the concept of Customer Value Management (CVM) – to maximize the lifetime profitability of your customer base. They say that if you fire your low-value customers, it provides competitors with an easy target (to go after your existing customers who they know are high-value customers). They say that if you make low-value customers more valuable, this can also be counter-productive because it also encourages your competitors to poach more intensely.
Their research states that the optimal solution is to keep the high-end customers and at the same time keep the low-value customer but find cheaper, better ways to manage them (self service, etc). You have to keep your competition confused about who your good and bad customers are.
I agree that there is a case to be made for firing low-value customers. However, this new research does offer a strong point of view – to NOT fire low-value customers. This is especially true in a highly competitive market – where firms are on the lookout to poach customers. So, the next time your boss asks you to fire a low-value customer – do consider this contrarian view.
Tuesday, December 25, 2007
Prof Bala Balachandran
Brief Background
Prof Bala Balachandran was my Professor during the Executive MBA program at the Kellogg School of Management. He is based out of Chicago but travels around the world frequently. I have gotten to know him over the last 2 years. I also had a chance to catch up with him in Chennai last December on a business trip.
He is on the Boards of several Indian companies including Godrej and CRISIL. He is also Chairman of the Board of ALLSEC Technologies – a global consulting and call center company with over 2,400 professionals headquartered in Chennai and operating in New Jersey, India, and Jamaica. Prof Balachandran has been honored with the prestigious Padmashri Award, one of the highest honors bestowed by Government of India for Excellence in Education and Literature. He is also the founder of the Great Lakes Institute of Management, a global business school, in Chennai, India.
His first foray in Indian management schools first started in 1991 – when he created the management program at Management Development Institute (MDI) in Gurgaon. Then, around 1997 he played a major role in forming the Indian School of Business (ISB) in Hyderabad along with Rajat Gupta (then CEO of McKinsey). Finally, he founded the Great Lakes Institute of Management in Chennai in 2004.
Dr Bala’s MBA School - Great Lakes Institute of Management
Great Lakes has several luminaries on its advisory board. Ratan Tata, Madhur Bajaj, Kumaramangalam Birla, G.P. Goenka, Indira Nooyi -CEO of Pepsi, Narayana Murthy of Infosys, Deepak Parekh - Chairman of HDFC, S Ramadorai - CEO of TCS, Ravi Venkatesan - Chairman of Microsoft India are on the advisory board of the school. He is also closely associated with President Jimmy Carter in the "Habitat for Humanity" program.
His students at Great Lakes call him “Uncle Bala”. Dr Bala states that the school is innovative in its approach to education
a) The curriculum requires students to work closely with NGO’s – thus nurturing corporate social responsibility
b) There are horizontal (marketing, finance, etc) and vertical (industry) specializations. Finance in a family run business is different than Finance in an investment bank
c) Emphasis on applied (empirical) research
d) Students learn Chinese as part of the course. Dr Bala recognizes that China is growing into a powerful force and is preparing students to be ready to take advantage of opportunities
e) He ensures that Professors have a good blend of teaching, consulting and research (publishing papers)
His views
Prof Bala is a fan of the partha system. Partha is a system of accounting that was developed in Marwari culture that permeated many Indian businesses, and its principles still influence the accounting and financial structure of Birla (mega Indian business house). Partha is a manual system to determine input costs and the daily cash flows. In 2001, Kumar Mangalam Birla (8th youngest billionaire outside of India with a net worth of $9 billion) hired the Boston Consulting Group (BCG) to install its Cash flow Return on Investment (CFROI) metric, which functions as a kind of computer-spreadsheet era version of partha.
Prof Bala states that he likes the partha system since many times companies with excellent bottom line, great EPS fool experts because they fail to notice the horrible cash flow issues. Partha catches that right upfront.
He mentions that generally people measure costs, manage costs and execute process improvements. He states that they should go further and use cost as a weapon for supremacy or leadership. Cost has to be understood to find opportunities and uncover risks where one is vulnerable. Of course one needs to look to increase top line (revenues) as well – however, if one does not understand their cost structure and its allocations (fixed, variable, direct, indirect) across the various product lines – it would severely restrict growth or cause the company to fold. He says when it comes to strategic cost management, the need is to identify various business drivers like value drivers, revenue drivers and cost drivers.
His plans
At over 70 plus years, Dr Bala is a man in a hurry. He teaches at Kellogg and is also very involved with Great Lakes. He is always on the move. He is eager to move Great Lakes into the bigger 18 acre facility – that will be ready in 2008.
Finally, I have been invited by Dr Bala to give a talk at his business management school (Great Lakes). I am absolutely delighted and honored by this offer. I do plan to give a talk during my next visit to India – sometime in 2008.
Prof Bala Balachandran was my Professor during the Executive MBA program at the Kellogg School of Management. He is based out of Chicago but travels around the world frequently. I have gotten to know him over the last 2 years. I also had a chance to catch up with him in Chennai last December on a business trip.
He is on the Boards of several Indian companies including Godrej and CRISIL. He is also Chairman of the Board of ALLSEC Technologies – a global consulting and call center company with over 2,400 professionals headquartered in Chennai and operating in New Jersey, India, and Jamaica. Prof Balachandran has been honored with the prestigious Padmashri Award, one of the highest honors bestowed by Government of India for Excellence in Education and Literature. He is also the founder of the Great Lakes Institute of Management, a global business school, in Chennai, India.
His first foray in Indian management schools first started in 1991 – when he created the management program at Management Development Institute (MDI) in Gurgaon. Then, around 1997 he played a major role in forming the Indian School of Business (ISB) in Hyderabad along with Rajat Gupta (then CEO of McKinsey). Finally, he founded the Great Lakes Institute of Management in Chennai in 2004.
Dr Bala’s MBA School - Great Lakes Institute of Management
Great Lakes has several luminaries on its advisory board. Ratan Tata, Madhur Bajaj, Kumaramangalam Birla, G.P. Goenka, Indira Nooyi -CEO of Pepsi, Narayana Murthy of Infosys, Deepak Parekh - Chairman of HDFC, S Ramadorai - CEO of TCS, Ravi Venkatesan - Chairman of Microsoft India are on the advisory board of the school. He is also closely associated with President Jimmy Carter in the "Habitat for Humanity" program.
His students at Great Lakes call him “Uncle Bala”. Dr Bala states that the school is innovative in its approach to education
a) The curriculum requires students to work closely with NGO’s – thus nurturing corporate social responsibility
b) There are horizontal (marketing, finance, etc) and vertical (industry) specializations. Finance in a family run business is different than Finance in an investment bank
c) Emphasis on applied (empirical) research
d) Students learn Chinese as part of the course. Dr Bala recognizes that China is growing into a powerful force and is preparing students to be ready to take advantage of opportunities
e) He ensures that Professors have a good blend of teaching, consulting and research (publishing papers)
His views
Prof Bala is a fan of the partha system. Partha is a system of accounting that was developed in Marwari culture that permeated many Indian businesses, and its principles still influence the accounting and financial structure of Birla (mega Indian business house). Partha is a manual system to determine input costs and the daily cash flows. In 2001, Kumar Mangalam Birla (8th youngest billionaire outside of India with a net worth of $9 billion) hired the Boston Consulting Group (BCG) to install its Cash flow Return on Investment (CFROI) metric, which functions as a kind of computer-spreadsheet era version of partha.
Prof Bala states that he likes the partha system since many times companies with excellent bottom line, great EPS fool experts because they fail to notice the horrible cash flow issues. Partha catches that right upfront.
He mentions that generally people measure costs, manage costs and execute process improvements. He states that they should go further and use cost as a weapon for supremacy or leadership. Cost has to be understood to find opportunities and uncover risks where one is vulnerable. Of course one needs to look to increase top line (revenues) as well – however, if one does not understand their cost structure and its allocations (fixed, variable, direct, indirect) across the various product lines – it would severely restrict growth or cause the company to fold. He says when it comes to strategic cost management, the need is to identify various business drivers like value drivers, revenue drivers and cost drivers.
His plans
At over 70 plus years, Dr Bala is a man in a hurry. He teaches at Kellogg and is also very involved with Great Lakes. He is always on the move. He is eager to move Great Lakes into the bigger 18 acre facility – that will be ready in 2008.
Finally, I have been invited by Dr Bala to give a talk at his business management school (Great Lakes). I am absolutely delighted and honored by this offer. I do plan to give a talk during my next visit to India – sometime in 2008.
Monday, December 24, 2007
The Kellogg team in India
I met up with Dean Dipak Jain and the entire Kellogg Alumni Advisory Board in Mumbai, India in early January 2007. Dean Jain brought about 60 members of the Kellogg Alumni Advisory Board on a week long India trip. Senior Associate Dean Kathleen Hagerty and Associate Dean Roger "Whit" Shepard also accompanied them. They spent 3 days in Hyderabad, a day in Mumbai and a couple of days in Delhi where they caught up with the Indian Prime Minister – Mr. Manmohan Singh. Sanjay Shroff – Kellogg alum from Bangalore did a terrific job co-coordinating the trip for the team.
My brother (who works for an investment firm in Mumbai) and I caught up with the team in Mumbai. We had a quick breakfast at the Taj Hotel in South Bombay. From there, we went to the HSBC office that was about 10 minutes away. Mr. Subir Mehra – Head of Commercial Banking at HSBC (also Kellogg alum) greeted us and gave us a presentation about his group. He was followed by 2 other Kellogg alums - Siva Ramamoorthy (Director Sales & Marketing – Intel) and Vinod Dasari (COO of Ashok Leyland) who presented their companies plans with the backdrop of India’s tremendous growth opportunities. I wanted to invite a good friend and an alum - Peter Mukerjea (then CEO of Star TV India), but he was vacationing in Australia at that time.
From there, we proceeded to the star event of the day – lunch meeting with Mr. Mukesh Ambani (ranked #14 richest by Forbes – with a net worth of $20 billion). See link for details http://www.forbes.com/lists/2007/10/07billionaires_Mukesh-Ambani_NY3A.html
We arrived at the Reliance (Mr. Ambani’s company) world headquarters in Nariman Point. His head of business development provided a brief overview of the company’s operations and history. After that, walked in Mr. Ambani. He was dressed in a simple white shirt and dark pants. He then proceeded with a short presentation of his company’s growth plans and his vision of establishing a retail division. The retail story is incredible because he is not just planning to build retail stores, but in-fact also backward integration with distribution channels, transportation, and logistics all the way to the farmer in the field. People who have followed the Ambanis’ know that when they take up a project, they do a fantastic job in setting new quality standards. He then took a few questions. After that, he posed for a group photo. See link here – my brother and I are at the back row.
http://www.kellogg.northwestern.edu/kwo/spr07/brandnews/kaab.htm
The team rested at the Taj hotel in the afternoon and then around 4:30 pm boarded 2 buses that took us to the TCS (Tata Consultancy Services) facility in Andheri. The trek was from the southern part of Bombay to the western suburbs. It was a huge sprawling campus which was very surprising (in a place like Mumbai where real estate is premium). The CEO of TCS, Mr. S Ramadorai and his leadership team hosted a dinner for us. Mr. Firdose Vandrevala (who was the CEO of Motorola India & Tata Power and now Chairman & MD of the Hiranandani group's real estate firm Hirco) also attended the dinner reception.
We finished dinner around 10:30 pm and then headed back home. It was certainly an honor to be in the company of those folks. The Kellogg team from the US seemed to have a great time in India (almost all of them had never been to India before). I am sure they carried warm memories of this trip. I certainly cherished this day with my fellow Kellogg compatriots. Dean Jain and Sanjay Shroff organized the event extremely well. The following day, they met up with the Prime Minister – Mr. Manmohan Singh in New Delhi.
My brother (who works for an investment firm in Mumbai) and I caught up with the team in Mumbai. We had a quick breakfast at the Taj Hotel in South Bombay. From there, we went to the HSBC office that was about 10 minutes away. Mr. Subir Mehra – Head of Commercial Banking at HSBC (also Kellogg alum) greeted us and gave us a presentation about his group. He was followed by 2 other Kellogg alums - Siva Ramamoorthy (Director Sales & Marketing – Intel) and Vinod Dasari (COO of Ashok Leyland) who presented their companies plans with the backdrop of India’s tremendous growth opportunities. I wanted to invite a good friend and an alum - Peter Mukerjea (then CEO of Star TV India), but he was vacationing in Australia at that time.
From there, we proceeded to the star event of the day – lunch meeting with Mr. Mukesh Ambani (ranked #14 richest by Forbes – with a net worth of $20 billion). See link for details http://www.forbes.com/lists/2007/10/07billionaires_Mukesh-Ambani_NY3A.html
We arrived at the Reliance (Mr. Ambani’s company) world headquarters in Nariman Point. His head of business development provided a brief overview of the company’s operations and history. After that, walked in Mr. Ambani. He was dressed in a simple white shirt and dark pants. He then proceeded with a short presentation of his company’s growth plans and his vision of establishing a retail division. The retail story is incredible because he is not just planning to build retail stores, but in-fact also backward integration with distribution channels, transportation, and logistics all the way to the farmer in the field. People who have followed the Ambanis’ know that when they take up a project, they do a fantastic job in setting new quality standards. He then took a few questions. After that, he posed for a group photo. See link here – my brother and I are at the back row.
http://www.kellogg.northwestern.edu/kwo/spr07/brandnews/kaab.htm
The team rested at the Taj hotel in the afternoon and then around 4:30 pm boarded 2 buses that took us to the TCS (Tata Consultancy Services) facility in Andheri. The trek was from the southern part of Bombay to the western suburbs. It was a huge sprawling campus which was very surprising (in a place like Mumbai where real estate is premium). The CEO of TCS, Mr. S Ramadorai and his leadership team hosted a dinner for us. Mr. Firdose Vandrevala (who was the CEO of Motorola India & Tata Power and now Chairman & MD of the Hiranandani group's real estate firm Hirco) also attended the dinner reception.
We finished dinner around 10:30 pm and then headed back home. It was certainly an honor to be in the company of those folks. The Kellogg team from the US seemed to have a great time in India (almost all of them had never been to India before). I am sure they carried warm memories of this trip. I certainly cherished this day with my fellow Kellogg compatriots. Dean Jain and Sanjay Shroff organized the event extremely well. The following day, they met up with the Prime Minister – Mr. Manmohan Singh in New Delhi.
Sunday, December 23, 2007
The Law of Large Numbers - Gambler's fallacy
The “Law of Large Numbers” (a.k.a. Bernoulli's law) is a statistical theorem that is defined as follows - The average of a large number of independent measurements of a random quantity tends toward the theoretical average of that quantity.
Simply stated, the law of large numbers states that if you repeat a random experiment, such as tossing a coin or rolling a die, many, many, many times, your outcomes should on average be equal to the theoretical average.
If you toss a “fair coin”, there is a 50% chance that it would be heads. However, it does not necessarily mean that if you toss the coin 2 times, you will get heads one time. However, if you repeat this experiment many, many times – you should get closer to 50% (number of times you get heads).
Mathematician John Kerrich tossed a coin 10,000 times while interned in a prison camp in Denmark during World War II. At various stages of the experiment, the relative frequency would climb or fall below the theoretical probability of 0.5, but as the number of tosses increased, the relative frequency tended to vary less and stay near 0.5, or 50 percent.
Insurance companies rely on this theorem. Out of a large group of policyholders the insurance company can fairly accurately predict not by name but by number, the number of policyholders who will suffer a loss. In other words, the more cars you insure, the more accurately you can predict the number of cars likely to be stolen. However, note that the individual policyholder cannot accurately predict (whether he will be in an accident this year or not).
Casinos also use this principle. The gambler's fallacy, also known as the Monte Carlo fallacy, is the false belief that odds increase or decrease depending upon recent occurrences. So, if black has come up 5 times in succession at a roulette table, the gambler is almost sure that the next one is red to even out the pattern. As discussed earlier, while it is true that the pattern will even out in the “long” run, it may not be necessarily true in the “short” run. Casinos take advantage of it (since they have the advantage of the long run).
Another area of confusion is how large is “large”? Is it 100 samples or 1000 samples or 10,000 samples? The technical definition is closer to infinity. However, from a practical standpoint, it is subjective and depends on the circumstance and the span of control.
A key statement to be understood is “A chance event is uninfluenced by the events which have gone before”. A coin toss, rolling a die, roulette is a game of independent trials. While using “samples” is certainly an effective statistical technique, be aware of the effect of the “Law of Large Numbers”. Do not fall prey to the gambler’s fallacy.
Simply stated, the law of large numbers states that if you repeat a random experiment, such as tossing a coin or rolling a die, many, many, many times, your outcomes should on average be equal to the theoretical average.
If you toss a “fair coin”, there is a 50% chance that it would be heads. However, it does not necessarily mean that if you toss the coin 2 times, you will get heads one time. However, if you repeat this experiment many, many times – you should get closer to 50% (number of times you get heads).
Mathematician John Kerrich tossed a coin 10,000 times while interned in a prison camp in Denmark during World War II. At various stages of the experiment, the relative frequency would climb or fall below the theoretical probability of 0.5, but as the number of tosses increased, the relative frequency tended to vary less and stay near 0.5, or 50 percent.
Insurance companies rely on this theorem. Out of a large group of policyholders the insurance company can fairly accurately predict not by name but by number, the number of policyholders who will suffer a loss. In other words, the more cars you insure, the more accurately you can predict the number of cars likely to be stolen. However, note that the individual policyholder cannot accurately predict (whether he will be in an accident this year or not).
Casinos also use this principle. The gambler's fallacy, also known as the Monte Carlo fallacy, is the false belief that odds increase or decrease depending upon recent occurrences. So, if black has come up 5 times in succession at a roulette table, the gambler is almost sure that the next one is red to even out the pattern. As discussed earlier, while it is true that the pattern will even out in the “long” run, it may not be necessarily true in the “short” run. Casinos take advantage of it (since they have the advantage of the long run).
Another area of confusion is how large is “large”? Is it 100 samples or 1000 samples or 10,000 samples? The technical definition is closer to infinity. However, from a practical standpoint, it is subjective and depends on the circumstance and the span of control.
A key statement to be understood is “A chance event is uninfluenced by the events which have gone before”. A coin toss, rolling a die, roulette is a game of independent trials. While using “samples” is certainly an effective statistical technique, be aware of the effect of the “Law of Large Numbers”. Do not fall prey to the gambler’s fallacy.
Saturday, December 22, 2007
The lunch carrier in Bombay - a lesson in management
Dabbawalas, (a person who carries lunch) in Bombay, India is a group of people carrying and delivering freshly made food from home in lunch boxes to office workers. Though the work sounds simple, it is actually a highly specialized trade that is over a century old and which has become integral to Bombay’s culture.
I have personally used this service while I used to live in Bombay several years ago. It may be a bit hard for folks to understand why it is “unique”, but once you understand the challenges of the daily office going worker (and the chaos in the trains) – you will appreciate this.
The dabbawala originated when India was under British rule: many British people who came to the colony didn't like the local food, so a service was set up to bring lunch to these people in their workplace straight from their home. Nowadays, Indian office-goers are the main customers for the dabbawalas.
At about 20,000 people per square kilometer, Bombay is India's most densely populated city with a huge flow of traffic. Because of this, lengthy commutes to workplaces are common, with many workers traveling by train. Riding in a local train is nothing short of an adventure. About 6 million people use the trains daily. Forget getting a seat – one would consider it lucky even if one has space to hang out of a moving train. The main mode of transport for the Dabbawala is the train. They have to maneuver the crowd every day – twice – once to deliver the food to the office, and then to return the container back to home.
See this link to get a glimpse of travel in a train in Bombay
http://www.searchindia.com/search/mumbai-pictures/mumbai-train.html
They carry lunch in a cylindrical aluminum container. Instead of going home for lunch or paying for a meal in a café, many office workers have a cooked meal sent from home - essentially delivering the meal in lunch boxes and then having the lunch boxes collected and re-sent the next day. This is done for a small monthly fee. The meal is cooked in the morning and sent in lunch boxes carried by dabbawalas, who have a complex association and hierarchy across the city.
A collecting dabbawala, usually on bicycle, collects containers from homes. The containers have some sort of distinguishing mark on them, such as a color or symbol (most dabbawalas are illiterate).
The dabbawala then takes them to a designated sorting place, where he and other collecting dabbawalas sort (and sometimes bundle) the lunch boxes into groups. The grouped boxes are put in the coaches of trains, with markings to identify the destination of the box (usually there is a designated car for the boxes). The markings include the rail station to unload the boxes and the building address where the box has to be delivered.
At each railway station, boxes are handed over to a local dabbawala, who delivers them. The empty boxes, after lunch, are again collected and sent back to the respective houses.
More than 175,000-200,000 lunches get moved every day by an estimated 4,500-5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. Forbes magazine gave a Six Sigma performance rating for the precision of dabbawalas (one mistake per 8 million deliveries).
The BBC has produced a documentary on Dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably, the success of the dabbawala trade has involved no modern technology.
The service is uninterrupted even on the days of extreme weather, such as Bombay’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. In fact, I recall an incident – when I reached office around 1 pm – due to traffic challenges caused by incessant rains – and was surprised to see my lunch container sitting on my table (it reached at the usual time of 11:30 am).
The secret to their success is lies in collaboration between team members with a high level of technical efficiency in logistics management. They follow some simple concepts effectively.
· Consistency - Whatever the food, it must all go within the standard container. No exceptions allowed. This helps them streamline their process in terms of delivery and handoff
· They adhere to low-cost (their charges are extremely low), excellent response-time (always punctual) and predictable quality (the food is not messed up). They DO NOT try customization/variety (meaning offering the flexibility to send items that do not fit in the container, temperature sensitive, etc)
The new Financial Power Brokers in the World
The Dec 2007 article by McKinsey outlines the world's new financial power brokers. In summary
a) The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.
b) The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.
c) At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.
d) Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.
Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth.
See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366044n
CBS 60 minutes - Part 2
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366046n
A nice report by Richard Edelman - CEO of Edelman PR firm
http://www.edelman.com/speak_up/blog/archives/2007/09/dubai_image_and.html
a) The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.
b) The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.
c) At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.
d) Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.
Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth.
See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366044n
CBS 60 minutes - Part 2
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366046n
A nice report by Richard Edelman - CEO of Edelman PR firm
http://www.edelman.com/speak_up/blog/archives/2007/09/dubai_image_and.html
Tuesday, December 18, 2007
Need an urgent reservation at a fancy restaurant?
You need to take your client or your date to Nobu, Lupa or Gramercy Tavern on Friday night? Need to take your friends to Le Bernardin this Saturday? You called these places and there are no reservations. Don't worry. PrimeTimeTables ( http://www.primetimetables.com/ ) might be your answer.
For about $40 (approx) a reservation, service providers like PrimeTimeTables and withoutreservations.biz will provide you reservations at fancy upscale restaurants.
Essentially, these providers capitalize on the arbitrage opportunity available (restaurants make reservations, but do not penalize no-shows). They make reservations under fictitious names well in advance and then sell that to the public. Once you purchase the reservation, you are provided with a pseudonym that you will need to use for your reservation.
Since restaurants usually experience an average of 30% no-shows, it is to their benefit to ensure a full house. The customer who is in a rush and is willing to pay a premium is assured of his/her reservation. By providing this service, PrimeTimeTables also makes a nice commission. Seems like a win-win all around - although some people do not like the idea of using "fictitious names".
Forgetting the moral side of the equation, it is an excellent lesson in Economics 101. Since the restaurant does not charge a penalty for no-shows and it hurts them (in case of a slow day/evening), the arbitrageur (PrimeTimeTables) finds the next available customer for the restaurant for a fee. As more of these providers come up, it would cause their fees to go down (price war). Also, it might become an issue for the “legitimate customer” to get reservations – since these providers would grab more and more of the reservations.
But till then, we can make an advance reservation ourselves at Nobu or go to PrimeTimeTables!!!
For about $40 (approx) a reservation, service providers like PrimeTimeTables and withoutreservations.biz will provide you reservations at fancy upscale restaurants.
Essentially, these providers capitalize on the arbitrage opportunity available (restaurants make reservations, but do not penalize no-shows). They make reservations under fictitious names well in advance and then sell that to the public. Once you purchase the reservation, you are provided with a pseudonym that you will need to use for your reservation.
Since restaurants usually experience an average of 30% no-shows, it is to their benefit to ensure a full house. The customer who is in a rush and is willing to pay a premium is assured of his/her reservation. By providing this service, PrimeTimeTables also makes a nice commission. Seems like a win-win all around - although some people do not like the idea of using "fictitious names".
Forgetting the moral side of the equation, it is an excellent lesson in Economics 101. Since the restaurant does not charge a penalty for no-shows and it hurts them (in case of a slow day/evening), the arbitrageur (PrimeTimeTables) finds the next available customer for the restaurant for a fee. As more of these providers come up, it would cause their fees to go down (price war). Also, it might become an issue for the “legitimate customer” to get reservations – since these providers would grab more and more of the reservations.
But till then, we can make an advance reservation ourselves at Nobu or go to PrimeTimeTables!!!
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