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Friday, February 25, 2011

So am I a 'compulsive reader'?

One of my close friends at IIM-A(who prefers to remain anonymous) once wondered whether I was a compulsive reader? To those not into reading(like him), it seems surprising that I read so much, more so that I read 'elementary' topics(finance related stuff). His comments got me thinking and here's this post.

I read for different purposes(other than the mandatory case readings)

  1. Entertainment:- While others prefer TV shows, films etc, I like the occasional novel or two
  2. Professional updation:- As one of the few people with 3 qualifications(CA/CS/CWA) spanning law, financial accounting, corporate finance, management accounting etc, I consider it essential to keep up with what is happening in my field. While trade magazines, blogs, newspapers and journals ordinarily suffice, books are sometimes essential for this. 
  3. Investing:-Also, I am an(so far) amateur investing who believes in special situations investing and value investing. For both of these, extensive knowledge base is must. 
Of course, it does help that I have(in the words of another friend) a 'thirst for knowledge'. But that does not mean that I rely on 'book smarts' alone. While I do like the company of like(and of late-unlike minded too!) minded friends, other professionals etc, I prefer to chart an independent thinking path. And that by definition does need some solitude or curling up with books. 

So why are MBA's paid so much anyway?

The IIM-A Final placements are well under progress(newspapers have reported an increase of 10%-20% in average pay packets). Often, these young graduates(me next yr!!) earn more than their parents(in their prime of career/at retirements) had ever earned. This pay disparity(which is what sparks off the MBA rush by applicants who think this is true of all institutes) is the subject of occasional debates where the point is raised-what value does a MBA bring to the table vis-a-vis an experienced graduate(w/o MBA)?

 While this issue will keep simmering, my 2 bits to this issue are:-

  1. Imperfect talent market:- Unlike the West, there is much more of a gap here between the 'best' and the 'rest'. It is not merely due to inputs('student quality' as measured by CAT scores, work experience, grades etc) but due to infrastructure issues(mainly faculty-you can build nice amenities but not faculty!). This, coupled with the first mover advantage and alumni network, gives the top colleges that 'brand'-which allows their graduates a premium relative to other MBAs
  2. Revenue Producers:- Consulting, Sales, Marketing and Investment Banking(the most in demand professions at B Schools) all share a common attribute-YOU are the revenue producer and not merely a support role. So when the performance is easily evaluated, it is linked to pay and a high pay can be justified. Of course, this is why job security is relatively weaker 
  3. Data Analysis/Comfort with ambiguity:- The case method teaches(for those who sincerely work on the cases before class) you how to crunch data and be comfortable with incomplete, conflicting and ambiguous data. While MDPs can cover this, a 2 yr MBA permits this attitude to be ingrained which then gives a better career start. Organizations value someone who can make sense of data AND be comfortable with uncertainty. 
I am not including stuff like communication skills(presentations etc), working with others(study groups are just proxy for real world) which both MBAs and non MBAs can develop with equal ease. So I would attribute the MBA non MBA pay differential to the above 3 factors only. 

How technology enables learning at top B schools(including here)

As I approach the fag end of the first year at IIM-A, a look-back made me realize how much I learnt extra as compared to a conventional classroom chalk-board approach.

  1. YouTube:- A-Z advertisements/video clips can be shown to make courses like marketing, advertisement, communication skills, operations management(clips of shop floor for city slickers) come alive, and help students visualize what is going on 
  2. Spreadsheets: Other than the usual suspects of Finance, Statistics, Strategy and Operations, sending the case exhibits of marketing, HR and other 'soft' subjects can enable using graphs, statistical analysis and data crunching to bring rigor to one's approach
  3. Podcasts/Videos:- Watching lectures streamed by experts like the Valuation Guru Prof Damodaran can supplement the B School lectures/notes. 
  4. Blogs/Blog Comments:- Several experts blog(specially the Seeking Alpha/ HBR/FT/Economist blog series) and the comments on their blogs are equally insightful. As the writer of the book 'Econned' mentions in his foreword those who comment often have relevant experience and insight and bring up issues and ideas that add considerable depth and color.They are also relentless in pointing out errors, omissions, sloppy thinking, and my personal bĂȘte noire, typos. Personally, I have found the comments on the best posts, even more enlightening than the posts themselves. If you want a current, expert writeup on an issue for tomorrow's class, a blog is often the best place to go online(even in this era of encyclopedic magazines etc) 
  5. Google Trends:- This tool(recently launched) has amazing potential for serendipity wherein you can learn what people are looking for(a must-know for a marketer/strategist.........)
  6. Google Documents:- Need to conduct a marketing survey? Need multiple people to fill out a form? No problem-just use Google Documents features to do this 100% free. This replaces cumbersome paper and allows downloading the results in an Excel file for further analysis
  7. Java(for simulations):- There are several free simulations of important concepts online which anyone with JRE(Java Runtime environment) installed, can access.
The future of education will(hopefully) go beyond all this. 

Tuesday, February 15, 2011

How social controls/academic rules reduce freeloading at IIM-A

At the outset, I define free riding to happen when someone does not use his abilities to the fullest extent for the group. A person's abilities may not allow him to 'pull his weight' in the group but that is not free riding.

A major disadvantage of working in groups(in an academic setting) is that where everyone gets the same grade, there is ample incentive to free ride. The free riders know that the responsible members among them will get the assignment done, in all circumstances. So a purely economic logic would dictate that the free rider maximize his personal utility(use free time in parties, card games etc) by reducing time spent on group work. This, when sustained for a long time would lower the output of the group.

But thankfully, this process is arrested in some ways;-
  1. Reformation of study groups:- Study group reformation(for 1st yr students) is allowed by the PGP Office(overseeing academic activities). To balance individual choice(a person should be allowed to pick his study group), management skill building(people should learn to work in groups they did not entirely choose) and equality(all study groups should have roughly equal capabilities), around 2/3rd of the study group is voluntarily formed and the balance 1/3rd is formed by random selections and interest surveys. The voluntary formation process generally excludes free riders and gives them a wake up call
  2. Reputation/Networking:- Whether it be standing for elections, interviewing for entry into a club or teaming up for a contest(all on campus) or seeking a connection from an alumnus(off campus), the reputation one builds on campus does stay for a long time. As a senior eloquently puts it on her blog(link here), free riders will take a long time to erase that initial bad impression. This social control is perhaps the stronger of the two(unless people are so thick skinned as to ignore insults, scorn and appeals to their better sense)
So why isn't free riding fully eradicated here? Sometimes, groups remain intact due to the emotional bond/friendship which overrule rational decisions. Also, some people turn free riders later(after reformation) due to depression, give-up mentality etc.

Saturday, February 12, 2011

Why(and how) MBA students should learn marketing

The first year at IIM-A is nearing an end and while the flashback was on, some points about marketing occurred to me. For those focusing on non marketing/consulting areas(finance, operations), Marketing sounds common-sense and 'globe'(in our parlance it means bluffing oriented subject). While this perception is routed in truth, I think MBA students should note some things

  1. Don't go only by books/teachers:- Some books/teachers(luckily not here!) are too theoretical/bookish to impart any practical sense of the field. Seek details from interns, people who have worked there etc. 
  2.  It is all simple stuff don't complicate:- Try boiling down the concepts to every day terms. For example, when the street seller quotes every person a different price by sizing them up, he's merely following the most efficient form of price discrimination!. No need to complicate things using jargon. 
  3. Marketing is needed because people have a choice. It is that simple. If you are a pure monopoly or close to that, you need smart pricing but not marketing. But if people can have other options, you need to differentiate yourself and for that you need marketing
  4. Be different from the road side person:- A layperson will just admire an ad but you should think about the reason behind it & the potential market impact.
  5. It is much more rewarding in this digital age:- Where telecom based marketing gives you accurate demographics, time/location based marketing etc, it opens up a whole host of opportunities
  6. It does need good numeracy:-A glib talker can become a great salesman. But a brand manager(the pinnacle of marketing) needs to manage the brand operations/sales/distribution/spending etc. The field has become much more quantitative now. So even for a numbers person, this field has some good opportunities. 
To conclude, job hunting needs personal marketing. So knowing the basics of marketing well, does not harm. And any advanced level application could only help the organization. 

Life lessons from Harsha Bhogle

The famous IIM-A alumnus(known for his cricket commentary) Mr Harsha Bhogle comes down to campus often, and shares some gyaan with us students. I was fortunate enough to attend one such session about half year ago(posting now since I found those notes during a spring cleaning spree!). He started with his usual disclaimers that they would all be sports related(thats all he claims to know!) and that he would not argue on cricket matters(since he does not want a busman's holiday).

The salient features of his talk(and my comments on them in Italics) were

  1. Join the winning team:-This improves your probability of winning  else you may end up like Mohd Ashaful(star Bangladeshi player whose talent is wasted because he is in a mediocre team. He could have bested Michael Clarke-star Australian player- but got no chance). Also, unless you have tasted success in your initial years, you would freeze/hesitate when the big moment of truth comes. This logic explains why young MBA graduates head in droves for the 'winners' and want to try entrepreneurship after some years of work-exp. I would agree that this is easier for the person involved. Of course, winning on what aspects('growth', 'reach') etc would need to be seen-business is not like cricket where Win/Lose is easy to calculate.
  2. The margin between best and the rest is small-stay humble:- In an era where that extra 1% separates the best teams, you should stay humble and focus on execution and related jobs like practicing well each time. This is true more so in business because complacency can easily erode that extra edge. Even the topper of a MBA batch sees competition yearly from subsequent batches, colleges and nations and cannot afford to rest on his laurels.
  3. Give your 100%- One can control one's efforts but not the outcome. Often, the best results take years to achieve(like winning World Cups). So, choose a field because of the passion you have, and the money will follow
  4. Analytics:- Success being a function of time, space and scale, it is important to use analytics well. Michael Lewis's book Moneyball is an excellent example of how analytics was applied to the professional sports talent market-with astounding results. This has lessons for business also. 
  5. Continuous improvement:- Giving the example of the one-trick wonder Monty Panesar(who has let himself go), Harsha said that one should invest in one self(practice, coaching, training) instead of expecting others to do so
  6. Size is not everything:- Teams like New Zealand punch much above their weight. In this liberalized era with lesser entry barriers, even smaller firms(with that success DNA) can aim to compete effectively. 
  7. Setting up success for others:- One cannot always hit that winning 6, score centuries and achieve records. Thinking in the team's interests and enabling others is important. The movie Chak De India illustrates this in the India-Australia women's hockey final where the 2 g termstar players set up goals for each other. Even consulting firms harp on this factor and this is essential-ensuring that your own interests are also served in the long term

Differentiating banks by people and branding

I always thought that the key success factors of a bank were  the 'reach'(number of branches, ATMs, global presence), reputation(do depositors trust that their money will be safe) and(of course) 'capital'. But post the global financial crisis, banks have begun to differentiate themselves via emphasizing the softer side(client relationship, trust, corporate responsibility etc) over their skills. In this context, the Dec-10 guest lecture at IIM-A by Dr Anil Kumar Khandelwal(Chairman & Managing Director of Bank of Baroda from 2006-09) holds many lessons for aspiring bankers(and in fact any corporate executive).

From his talk, I can garner the following insights

  • Showing commitment wins over people:- When he began his career, Kolkata was regarded as a 'punishment posting' for bank officials who were quite eager to return to other regions. Dr Khandelwal, on the other hand, surprised his boss and peers by seeking a longer tenure. This won over the unions and staff there, who perceived that their boss had 'skin in the game' and meant well
  • Bank goals and staff goals need not conflict:- When Dr Khandelwal met the Kolkata staff, he found out a main grouse that there was no growth in their region(branches not opening etc). The bank policy was not to recruit more people till the overstaffed workforce was cut to size. He then obtained the buy-in of the unions to open nearly 1/3rd more branches with the existing work force itself. This instilled pride in the staff, more growth opportunities for them and achieved the bank's objectives
  • Implementing staff suggestions:- He said that their best changes had come from the line staff and not from 'fancy reports'. He however added the caveat that unless the suggestions were implemented(or reason given why impracticable), the pipeline would dry up. This is common practice now in most MNCs but was a new thing then specially for public sector banks
  • Rebranding works:-He changed the logo to its present orange sun one. He faced opposition but could overcome that by some deft maneuvering. Now, the bank has a 'youthful', 'tech savvy' image as compared to its stodgy old image.
This shows the power of intangibles even in the financial sector where technology threatens to assume the prime place. Such initiatives are sorely needed presently.

Thursday, February 10, 2011

The sad story of the sugar futures ban-a regulator's perspective

During his talk at IIM-A, Mr BC Khatua stressed upon the price discovery and policy tinkering aspects of the commodities futures market(specially in the Indian market where spot prices are imperfect). He cited the sugar industry as an example of how the 'messenger was shot'(my words). He deplored the 'ignorance'/'narrow mindedness' of some of his colleagues on that topic. 

Everyone and his uncle(then) has analyzed the sugar futures issue and I do not wish to repeat their excellent analysis.Suffice to say that post a harvest failure and international supply crunch in Brazil etc, sugar prices had shot up to Rs 27-28(from Rs 13-14) by Sep-08 and futures traders were blamed for the same. When the regulator was asked for an explanation, he gave a detailed analysis citing crop statistics, global trends etc and forecasted a price of Rs 39-40 IF preventive action was taken now by encouraging farmers to grow more or allowing import of the nearly 3 million tonnes requirements @ $300/ton(prevailing rate).He did not want to shut off the price signals by suspending the sugar futures contracts.

But under pressure from the Agriculture Secretary, he gave in and decided to suspend the contracts. Another reason was that he did not want the fledging commodities futures market to be blamed for the inevitable price rise. And in less than two years, the price levels(retail) had touched Rs 50. The 3 million tons gap was imported at $700-850/ton. This gap may have been filled domestically but farmers had not got the price signals to act by sowing. If they had sown, given the 12 months crop cycle, the gap would have lasted 1 yr instead of the 2 yrs it did.

Some nice analogies describing regulation, commodities markets etc

During his talk at IIMA, Mr BC Khatua in his pithy style, explained abstract concepts with some superb examples which I'm reproducing below.
  1. Building of house analogy:- To build a proper house, the architect(regulator) needs to plan the layout well and in detail(legal structure/framework). But he cannot build the house himself. For that, he needs masons, plumbers, carpenters etc(market intermediaries ) whom he supervises(regulations). But he cannot himself monitor them always. So he prefers them to have some self monitoring(Self Regulatory Organizations-SROs like Stock Exchanges). For the plan to be achieved, all must work in tandem. Similarly, for a proper securities framework, the intermediaries are equally important and that is why they are 'governed' separately via licensing, fit and proper regulation etc
  2. Luggage free passenger analogy: An arbitrager or day trader do not keep any open positions at the end of the day(but profit on intra-day swings). This is similar to 9-5 luggage less travel!!
  3. Infant analogy:- The FMC though nearly 60yrs old has not developed like SEBI/RBI due to Govt control/market conditions. For it to become as effective a regulator, it needs to be nourished/fed like how SEBI was in 1992(via autonomy, powers etc). My take on this is that the securities scam hastened the formation of SEBI but no such thing has happened to speed up the transfer of powers to the FMC
  4. Long/Short analogy:-A farmer is 'long farming' from the time he sows his seeds, but he is short only on the day he sells. It is for us to ensure that he gets more platforms/time to execute his short position and earn more. Giving post harvest credit will dilute the financial pressure to sell at throwaway prices at the mandi. Encouraging competing channels with mandis could improve the realization at the farm gate without increasing the customer's food bill. 

Why the FMC Chairman Mr BC Khatua opposes amoral speculators.

The FMC Chairman Mr BC Khatua views pure speculators as amoral(see interview in Mint). But it was only today during his lecture at IIMA, that I got to know the genesis of his views on this subject. And it was truly shocking to hear-its also an excellent example of being careful about the impression you make on others.

When he had visited the NYMEX in May-08(when oil prices were $125 a barrel and rising), he had interacted with a young trader(maybe someone like me 1 yr hence!!!). He had asked the trader his views on oil prices in 6 months and beyond but was answered with a nonchalant shrug that the prices could go only one way-UP. Now, Mr Khatua knew that(then), the oil supply was almost balanced and there was no fear of shortage. When he probed the trader, he heard that the PE/hedge funds/HNI's were all seeking that alpha(extra return to tune of 30%-40%) for which they decided to go bullish on commodities like oil. After all, the slightly balanced situation could tip at the margin with sudden demand from emerging economies like India/China. Now, I do not see anything morally wrong with this approach but Mr Khatua felt that this was misusing a legitimate hedging tool to exploit one sided supply side issue(?).

He also faulted the SRO(exchanges) for following herd mentality in their regulatory tools like margining, position limits etc While he could find some justification in their fear that trade would shift offshore(UK/Singapore etc) if they enforced tough limits, he still felt that this reluctance to enforce their own powers, was the reason speculators could ride freely.

This experience seems to have deeply impacted him as these views persist even nearly 3 yrs hence. And while he is at the helm of FMC, it is unlikely that high frequency traders/ huge financial investors will be allowed into India's commodity futures markets.

Regulation and Governance of Commodity Markets in India-amazing lecture by Mr BC Khatua(Chairman, FMC)

Even at IIM-A, IAS officers and regulators do not drop in daily! So when the 1976 IAS batch officer Mr. B C Khatua visited IIM-A to deliver a guest lecture for an elective course, I decided to attend come-what-may. And the lecture was fabulous and entertaining(some of his pithy analogies described here) . This post tries to encapsulate the learnings from that session but is not a verbatim transcript. Some parts have been transposed for logical flow.  My analysis is in Italics.

Given that most attendees(2nd yr PGP-ABM students) had attended 15+ lectures on this topic, Mr Khatua plunged into his talk with the wry observation that he had returned from a Parliamentary hearing where he found it difficult to educate people about the basic distinctions between commodities futures, commodities spot and equities markets.

Piercing the common misconception that all futures markets are alike, he explained the following differences between commodities and other future markets.
  1. In commodities markets, someone is affected at any point of time(in high price scenario consumer in low price scenario producer) so the chance for discontent/lobbying is more. In equities market, as Buffet puts it, 'a rising tide lifts all boats' so people are generally happy with higher prices
  2. Commodities can never touch zero(intrinsic value>0) but equities can touch zero. Equities will have some residual value('call option' value in finance theory sense) so this point is not strictly right.
  3. One can generalize across stocks but each commodity is very different with its own idiosyncrasies. There are much more variables(so scope for detailed econometric modeling)
  4. Due to India's inadequate transportation, spot markets/financing(for agricultural commodities only), there is no common spot market which is more like 28 spot markets! GST and APMC reforms may close this gap though. Till that happens, these local imperfections will magnify any national/global trends. For example, inability to transport perishables may magnify effect of frost/rains.The FMC works around these issues by polling prices(mechanism similar to how LIBOR rates are calculated),
  5. Imagine 2 tug-of-war teams There are diverse interests with contrasting views(long/short) and so the market should be in finely balanced equilibrium. Even if rumors/speculation etc come, it is easier to confirm/disprove than for equities/securities. So the intra-day volatility is higher than in equities but the trend is more stable. Exception was for the high oil bubble seen in 2008(explained here)
  6. The virtual market is much more affected by the vagaries of the real market. No one bans a stock future if the stock tanks but as the case of sugar futures(described here) shows, the futures market was blamed for the intrinsic spot market issues.
  7. Unlike stock markets(no comparative advantage in opting for stock settled futures),physical delivery in the commodities futures market is preferred by quality conscious buyers(compared to taking from spot market)  because
    1. Their contracts are better enforceable(penalties for opting out besides MTM)
    2.  Quality is more much specified and warehousing conditions are good
 He concluded by stating that besides the FMC Amendment bill before Parliament, the spot market reforms(GST, APMC reforms, bank credit, warehouse facility, transport improvement) was needed before the commodities futures market could really take off. His hope was that one day, the farmer would aggregate enough to actually trade on the exchange platform(This seems unlikely but who knows?)

    The Story of how FMC allowed Iron Ore futures

    I read in Mint(article here) about the Indian commodities futures regulator FMC Chairman permitting commodity exchanges to offer iron ore contracts. But it was only during his talk(described in my other post) that the details of this decision was explained. Mineral ores are bulky, difficult to transport(poor transport from mines) and hard to deliver on the exchange platform(can you have warehouses for 1000's of tonnes of ore). Still, as iron ore exporting states had either banned(Karnataka) or sought bans(Orissa) on export of iron ore, the FMC thought of introducing a contract to help hedge against the resultant price fluctuations.

    When the FMC had received a proposal 4-5 months ago about introducing these futures, it took them time to decide on a 'reference price'. After all, ore quality varies as per the mine, and the price is excluding transportation costs which can vary as per distance, mode(truck/train) etc. Also, the spot market is fragmented and small due to long term purchase commitments. But when they resolved the issue of 'reference price', they had to forgo the 'physical settlement option' prevalent in other commodities.

    The absence of physical settlement may induce price manipulation but as mentioned by Mr BC Khatua, the basic metal ores(iron, copper) being widely tracked and monitored, the manipulation risk is low at the domestic level(of course, in my view, you cannot account for global mining cartels). It is too early to evaluate whether this futures contract will help steel producers but it should be interesting.

    Sunday, February 6, 2011

    How corporates are using contests/games as recruitment tools.

    Imagine you are a recruiter who needs to gauge the quality of a Bschool and the interest level of students in your industry. Bschool rankings can be skewed(also every Bschool may not do well in all sectors), student interest may vary etc. Also, conventional indicators like past academics, CAT scores, extra curriculars are at best an approximate indicator of the candidate's ability to perform on the job.

    So some Indian recruiters have devised innovative strategies to persuade the students to submit to 'job testing' via their participation. Some examples are
    • Mahindra & Mahindra(M&M) :- They conduct a contest 'War Room' in which M&M business heads submit some business problems for students to analyze and present solutions. Open sourcing you may think. Yes-with a twist. Participation is restricted only to a few Bschools considered 'good' by the M&M team, and is at the national and all India level. Winners of this contest do not get a 'PPO' per se but certainly would have an upper edge in any recruitment done by M&M for their strategic planning division.
    • Aditya Birla Group(ABG):- ABG holds a competition 'Stratos' via a Simulation. A business problem is simulated(for example setting up a car factory) and then information is fed into the simulation. Decisions are made under uncertainty. This contest is again restricted to few Bschools and held at the campus level. 
    • Johnson & Johnson(J&J):They have a marketing launch case contest with PPI(pre placement interviews) and summer internship offers given to the winners.
    • Religare:- It holds a trading simulation titled 'Trader's Trophy' where at the end of the trading simulation, participants get a composite score for their profitability, risk control and client service(all parameters essential for on the job success).
    All these contests have nominal prize monies but give the recruiter valuable data on
    • Interest levels of students in the activities the company seeks people for
    • Comparable performance of Bschool students(eg whether IIMA does better than IIMC)- and also gauge the level of a campus
    • How Bschool students(future leaders) actually perform. This can be used to design aptitude tests, interview questions. 
    • Also, students may not know their inherent potential(or limitations) but may find it out via games. Trading games are particularly valid indicators for this
    On the flip side, these game results may well be one-offs and incomplete. But they certainly are a good start.  Such unconventional HR strategies may help companies like how baseball players selection using statistics(as described in Michael Lewis's book 'Moneyball') helped that team.