Thursday, October 25, 2007

Blog Now Outdated Go to

This is just an outdated blog now. I have been seduced by the wordpress agents and am now found here

Wednesday, August 08, 2007

Rural Marketing Programmes: Growing the Pie, or Pie in the sky?

First, acknowledgments. This topic was given by Ms. Deepti Potnis, budding consultant, as a sample of her spectacular skills at delivering customised solutions to undeserving petitioners. No, seriously, she gives good solutions. And her blog is not too bad either. Visit it here. Now that my mandatory commercial is done, back to the topic!
Rural Marketing and products for rural markets are wonderful things for companies. For one thing, everyone insists that you just cannot ignore a market of close to 600 million people. It has to be profitable surely!
Another reason is the wonderful idea that companies are socially responsible if they bring out products for the Indian rural chap. After all, by doing this favour, they manage to educate the rural masses about the world outside, which is a great thing after all!
It cannot be denied that 600 million people is one huge market opportunity. At the same time, if it was so easy to crack the market, it should have been cracked already. And strangely enough, it has been opened up, and for a long time too. Many people have ooohed and aaahed over Hindustan Lever's (Now Hindustan Unilever) amazing distribution network. But the fact of the matter is that if the largest FMCG player in India is actually ITC, with its cigarettes available across the length and breadth of the country (of course, cigarettes are not an FMCG product, don't ask me why).
Coca Cola and HUL have certainly done a fantastic job of opening up the rural markets. HUL's project Shakthi has been an unqualified success, as has the chota coke campaign of the soft drink maker. But these amazing successes have not come free. Coca Cola spent a decade in India before it could make the rural breakthrough. And HUL has been around for donkeys years. And something is interesting about both of these companies. Neither have really brought out separate products for the rural markets. In the case of Coca Cola, it was a case of reducing the unit quantity and thereby the price, while for HUL, it was more of a distribution chain improvement.
Kotler has 4 P's, which are Product, Price, Place and Promotion. This brings me to my point. Rural marketing seems to essentially be a problem of price and Place(distribution). Promotion in the cable connected and aware rural markets does not really seem a huge problem. And products designed for the Urban market seem to do decently in rural India as well. Perhaps the Urban rural divide is not as large as most people believe it to be. The problem for most companies is that Product and Promotion is strangely enough, the easiest to redo or remake. Cost competencies which affect Price, and Distribution and supply chains, which make Place irrelevant are far more difficult to obtain. They take experience, and initial investment.
So simply put, I think it is fair to say that unless companies get their cost and distribution act together, that beautiful rural market is going to remain a mirage, or a pie in the sky. The companies that have successful products will have to find that most difficult of things; an efficient distribution system, in order to ensure that they grow the pie! Or else, they will just end up eating Humble pie.
Well, that is it for this post. More management topics are invited, cause I am running out of too many cool new ideas. I promise credits for all topic submitters!

Thursday, August 02, 2007

Japanese Money Back Policies

Well, this is not a strictly economic post, but this was so weird that I just had to put it out. Apparently, people in Japan are scrupulously honest when it comes down to cash...and they have lots of rich people with too much of it too.
Some people have been busy putting envelopes of 10000 Yen in public toilets for people to take away. And the dumb jocks have been returning it!
Ditto with money raining down from the sky. Someone rained a 100 banknotes down near a mall....all 100 were returned.
So what does this say about Japan? That they are scrupulously honest? Give me a break...They are only as honest as the next guy is. But they do live in a society with far more surveillance than most others. After all, its a small place, and when every other Tom, Dick, Harry, or Nakamura has a mobile camera along, you really don't want to look like a fool. Even if the cost of it is money going waste. Besides, they could then be parodied on YouTube, and maybe a manga would be made of them!
You know the worst thing about the money though. If no one claims it (and it is not likely they will), it will go into the public funds. That is why it prompted some Jap Wiseguy to say, "It must have been a foreigner wot threw all that cash away. Which Japanese person would give his money to the government voluntarily. Cause every Japanese person knows about Japanese and money found on the street!"
Find the full story here

50th Post....And hiring Teams

Blogger tells me that this is my 50th post on the looks like this has lasted a lot longer than most! So, here is to many more posts to come!
Now back to management stuff! I was talking to a friend on GTalk, who was cribbing about the lack of personal interaction and friends at work. I was of course, doing much of the same as well, when she came up with quite a great idea.
She asked why companies don't hire in teams of 3-6 people, all of whom are friends and have experience working in a team with each other. I thought of half a dozen reasons why not, but they all fundamentally boiled down to, "well, we have not done it before!"
Consider this. Companies make a huge hue and cry about how its teams that are important today rather than individuals. And yet, they go around busily hiring individuals, and then mashing them up into teams willy-nilly as and when needed. It makes little sense. Instead, why not try hiring a group of 4-6 people, say those who have done a project together and who get along with each other, and then see how the team goes.
I am certain that such a team would clearly outperform a team of strangers. Your strengths and weaknesses are all known, and every person in the team would be having far more effective for that knowledge. And as a handy advantage, they can play together, as well as work together. All in all, a company would be pretty well off with that.
So, I guess I should jot this off to a nearby HR head of a large IT company and see what they think of it. I am sure they will think up a million objections. But it would be worth a shot, would it not?

Monday, July 30, 2007

Transaction Cost Economics and IT Infrastructure

I was handed an interesting link by bloggerazzi about a part of economics that I had never heard about till date, called Transaction Cost Economics.
previously, the inefficiencies of a manufacturing system were found on the assembly line. So, if a production line slows down, or if extra material is machined, then you know where to pin the blame on! Catch the worker on the line, and improve the process!
But that only worked to an extent, and todays economies are now somewhat different. How, you might ask?
Firstly, todays production lines are not solely dependent upon the worker. They also depend on the supervisor, the inventory scheduler, the middle manager, the stores guy, the accounts man, and half a dozen lawyers to boot.
Basically, a transaction where the only trade is in intellect and services is subject to several unique features. First, is of course, how do you bill the transaction. Second, and linked to one, is measuring the effectiveness of the transaction.
For example, if you were performing a machining operation on a lathe, you could work out to the nearest penny how much it costs to produce a component. Right from the power consumed, and the cost of the interest on the loan for the lathe, to the wages the underpaid lathe man gets paid, everything is accountable.
But how do you rate the effectiveness of a manager? Or judge the utility of a lawyer? Most of the time, they seem useless...but trust me, when you are hit with a lawsuit, you will wish you had a good lawyer (And good accountants too).
Transaction Cost economics tries to quantify these things and come up with numbers that denote their worth. But at the same time, some interesting points come up! Firstly, we see that as an operation becomes more complex, there are more transactions needed to complete the job perfectly.
From this we come to the old one about the factors of production. We all know 3 factors of production. They are
1. Land
2. Labour
3. Capital
But there is a fourth factor which comes up, and transaction costs best defines the fourth factor of production, which is, Management.
In short, Management can be defined as the factor by which the transaction costs that determine the other three factors can be reduced. I do hope that last sentence made sense, because it is the crux of the next point.
Management is also about handling information efficiently. And today one of the points that has been made is that management requires information instantaneously. This has been the reason why IT investments have frequently been justified. They are supposed to reduce the transaction costs made due to lack of information. But IT investment adds another transaction layer to the entire system, and must justify itself. Also, it is seen that the amount of information gathered creates yet more transactions in information processing. This is one of the reasons why IT implementation frequently is seen as a failure. The initial gains that are promised are all used up in the implementation of the IT system itself.
So, one of the things that anyone interested in designing IT solutions should be doing is to map the transactions that take place in any process. Then, identify the transactions that can be reduced or eliminated. Third, quantify the costs that will be saved by reducing these steps. The last process is the one that is truly difficult. And that is to anticipate the additional transactions that will ensue from bringing your IT system into place.
One of the reasons why designing an IT system is not the same as simply automating the process. And why IT consultants earn their fat pay packets too!

Monday, July 23, 2007

Privacy and security

There are literally thousands of emails and articles written which talk about email security, and how you should not reveal data about yourself online, such as your birthday, or the colour of your eyes. Why? Because, if you do, people can steal your identity, and then steal all your money from some bank.
The first time I saw these emails/articles, I agreed wholeheartedly. Of course it is right that we should protect these details from malicious hackers. And then I realized exactly what it was that I was protecting. After all, I like presents, so I widely publicize my birthday to one and all anyway. And anyone who wants to steal my identity is surely going to have enough initiative to see my photo to check the colour of my eyes. There are enough of those lying around in the world!
What it seems to me is that the companies which are being affected by identity theft are trying to pass the buck here. Why on earth do they not have better security systems. After all, its easier for them to blame the poor customer than it is to make sure that problems don't crop up in the future.
So, I am going to be a lot more suspicious when someone asks me to hide my birthday on my orkut profile.

Thursday, July 19, 2007

Of overcharging Taxi Drivers, and all of their ilk -- Sub optimal Economic Equilibrium

Yesternight, a friend of mine was attempting to hail a taxi at Salt Lake in Kolkata. Of course, no taxi guy seemed to be willing to take him for anything under 10 times the actual price, so he had to walk in the end.
But this got me thinking. According to definitions, perfect competition would exist when it is very easy for people to enter and exit the market. By that definition, taxi drivers in Salt lake should exist in perfect competition. But clearly, because prices have not fallen, it seems as if there is no perfect competition here. Why is that so?
Now, at first I thought it could be cabals or unions that distort the free market...but that did not make enough sense. So here is an alternative explanation for why taxi and auto guys charge so much...even though due to competition they ought to offer cut rate prices.
Let us take a hypothetical case where there are 1o taxi drivers. In most places, such as Bangalore, or bombay, there would be a plethora of customers, and the taxi driver would have choices, as does the customer. Also, because most of the customers are locals, knowledge of the locale is also assumed. In this case, it seems to me that the perfect competition model ensures that the lowest prices will be guaranteed.
However, in a place like Salt Lake and Gurgaon, the case would be slightly different. Firstly, the local populance is unlikely to travel by taxi. In salt lake, this is probably due to familiarity, and lack of places to go to. In the case of gurgaon, it is because those who live there are likely to have their own private means of transport like a car or a bike. Therefore, the only people who are likely to hail a taxi-cab are going to be people who are not locals. Also this subset is definitely smaller than the superset of all the people living in the area.
So to summarise, problem is
1. Information Asymnetry
2. Finite customer base.

So, let us take a hypothetical case of 10 taxi drivers, and only 2 customers. While it seems counterintuitive that the prices should go up, here is why they will. In order for the taxi driver to make ends meet, he will have to get revenues of say Rs. 200 a week. Whether he gets it by taking 1 fellow 5 times or taking him once is immaterial to him. Therefore, now these 2 customers will now pay 400 between them. Now, while only 2 taxi drivers benefit, averages say that the next day, another 2 taxi drivers will get 200 and the first 2 will go without clients at all. So, all in all, in a 5 day week, all the taxi drivers will get paid, and the total income would be Rs. 2000. (200 a week per taxi driver)
What would happen now if 1 guy undercuts to a more realistic fare...say Rs. 30. Remember, this is a price inelastic market, so the number of customers won't really go up. So he might get 2 more passengers added to the market. Now, by perfect competition laws, every other taxi driver should also lower his prices down to 30. So now, the total revenue made by all the taxi drivers now is 4x30x5= Rs. 600. This means that every taxi driver now gets only Rs. 60 in a 5 day week.
So we have a perfectly logical explanation for why taxi guys overcharge in certain places. Its market demand a and supply based, after all!
But there is a neat little corollary here. This is in reality a vicious cycle, because the assumption that is made for this to work is that the demand is inelastic with respect to price. This assumption was made with respect to mobile phones when they first came to India. The rates were incredible, with prices going as high as Rs. 27 per minute. Obviously there were not many takers for that sort of price. But once TRAI mandated changes to pricing, companies were busy complaining that they were going to make huge losses. But to their surprise...they did not...the market got them new customers....and that began the price war that led to perfect competition (practically).
The analogy of course with autos and taxis is this....someday, someone will cut the price and address a market of locals as well...then the traditional elastic demand and supply economics will triumph!
But till then, if you live in Salt Lake or Chennai...prepare to get fleeced by the local private transport providers!

Tuesday, July 10, 2007

Biofuels-- Agrofuels. Whats in a name?

Today, I thought I would enter the biofuels debate. After all, every Tom, Dick and Harry wants to enter the debate. So why not Balasubramanian?
Biofuels are the common name given to anything that provides energy that comes from agricultural sources. This could be ethanol, power produced from bagasse, jatropha seed juice, even methane from cowdung.
So why is everyone interested in it now though? After all, these things have been around since the dawn of time, practically. Heck, I remember watching programs on biogas when I was a kid, and Doordarshan was the only Channel available!
Well, the answer is simple. 10 years ago, a barrel of crude oil used to cost $12-14. Today, it is about $76. Economics says that if prices go up, demand for the product goes down. But Oil is a strange commodity. Like food, the modern world cant seem to live without it. Thus, a situation in economics called inelastic demand sets in, where demand is somewhat independent of price. But even though the demand stays constant, now there is a desire for substitute sources. And this is where biofuels comes in.
Burning Ethanol in the car engine has been around since Gerald Ford made the first Model T. After all, it was a car designed to run on alcohol. But who would like to go through the lengthy process of growing a crop, and then waiting for it to grow, and finally produce alcohol fuel, when you get high grade petroleum oil practically coming out of the ground for free! So alcohol was abandoned. But when oil hit $50 a barrel, the interest was rekindled. After all, the cost of sugarcane is not too much, and alcohol could now be substituted. And besides, after all the hoopla about green energy and global warming, producers can get labelled as good guys even while they rake in the money!
But can there ever be a perfect deal? Unfortunately no! What you gain on the swings, you lose on the roundabouts. Ethanol is produced from three major crops; sugarcane, corn and sugar beet. But sugarcane requires fertile and irrigated land. And even if we take the entire cropland in the world and grow sugarcane on it, we probably would not be making enough ethanol to supply our needs. At best, ethanol is a partial substitute. Also, the diversion of land from food crops to sugarcane leads to a situation where food prices will become a serious problem. This is especially because the crop is grown in countries which are not precisely rich; Brazil, India, Africa, and the likes.
So the lobby against biofuels is slowly building itself up. But this is a debate that will probably be decided by the Financial officers and the bean counters at an office rather than in the streets and farms. But the end result may well be seen in the economics classrooms when people discuss case studies on substitute products!