The last decade has been an epoch making decade for social networking. Initial e mail chat and messenger platforms got soon overwhelmed with more powerful and people-savvy social network sites such as Facebook, Orkut, Twitter and more lately Google+. The power of these new social networking platforms is enormous. There are at present over two hundred social media sites. Amongst these, the Top 15 account for over 1.3 billion estimated unique monthly visitors as per the surveys. Facebook alone has reportedly over 700 million user traffic per month while Twitter has 200 million user traffic per month. The newly launched Google+ has signed up 32 million user traffic in just 4 months of launch. With the ownership and use of moblile and smart phones growing rapidly, with tablets taking on new media connectivity roles, and with the social media sites directly linked onto smart phones and tablet devices, it is easy to imagine that social networking would have nothing but an exponential growth rate in the years to come.
In addition, these social media networks have become wonderful vehicles to connect with and follow leaders from all walks of life. Equally significantly, Facebook and Twitter have become platforms for business communication and marketing too, with virtually every big corporation having a Facebook or Twitter account. Given their enormous potential for instant and expanding connectivity, these sites have been carriers of landmark events and happenings around the world. They have also been the triggers and propagators for certain unique political and social movements that have swayed the world in recent times. Though there have been privacy and other concerns relating to some of the sites, it appears that social networking has come to be established as an irreversible phenomenon of this decade, and probably of the several decades to come as well.
Underlying motivators
The enormous popularity of these social networking sites has been due to five basic behavioral underpinnings of the new age intellectuals. The new generation has an unprecedented urge to connect and communicate, and the social media, devices and sites have been perfect platforms for that. The author of this blog post has identified five essential drivers of individual dispositions and behaviors. These are: See the Face, Share the Past, Explore the Uncertain, Bridge the Distance and Form the Community. Each of these five trends has significant implications.
See the Face
The new Gen-X individual is neither shy nor discrete. He or she loves to be seen and heard. He or she has few privacy concerns, if at all, and revels in disclosures that profile him or her on multiple dimensions. This enables a level of trust and transparency that leads to virtual friendship in most cases, despite the real threats of misuse of privacy data that exist.
Share the Past
While past is no predictor of future, one's past is a great builder of future bonds. The social networking sites, especially Facebook, have as their unique proposition an ability to mine the past to suggest connectivity. Equally, the social enthusiasts post their past experiences and photographs on their walls, providing a solid foundation of shared experiences and evolutions on which new superstructures can be built.
Explore the Uncertain
While the adage goes that face is the index of the mind, any entrant to social networks is essentially an adventurist. He or she would be connecting with persons whose real antecedents and motivations can rarely be accurately verified. That said, what the patrons of the social networking sites bring to the table is a willingness to explore the uncertain, an essential requirement of the quest for progress.
Bridge the Distance
With the growth of social networking, distance has ceased to be a separator. In fact, one may hypothesize that the farther one is the closer one becomes. The ability of the hardware technologies and the power of the operating systems of the modern connectivity devices and platforms have together made audio-visual meetings a common place happening. Text the Talk is the new mantra that keeps the new generation connect seamlessly across boundaries and oceans.
Form the Community
All these behavioral trends naturally help the users of social networking sites become communities based on certain dimensions of their choice. The power of these communities lies in their common diaspora as much as in their diversity. These communities, therefore, tend to be philosophically robust with cross-cultural and cross-functional enrichments. In many ways, these communities tend to be modern age icons of unity in diversity.
Social moorings, national perspectives
Given that the social networking phenomenon has unleashed such a massive transformation in global connectivity it is apt and opportune to explore what else can be done with the enormous "social energy" that is created. No doubt, this phenomenon has led to the individual participants discover more meaning in their lives and the business participants achieve greater reach in the social base. At the same time, like the energy of the mighty oceans, the energy of the formidable social networks is often idled, if not wasted, through non-value adding activities. Social scientists even hold that these have become obsessive diversions from other productive activities while some medical specialists hold that the Internet addiction to be a clinical disorder. That said, neither the march of technology nor progress of connectivity can be undone; rather creative ways must be found to channel the enormous social energy on the Internet that is the order of the day.
One very relevant channel to direct the social energy would be national missions initially, followed up with global visions. As some of the recent social campaigns have shown, the young and the intelligent have a huge stake in how societies, economies and nations would shape up. This requirement can only be more profound in India than in any nation given that India would have the youngest and largest demographic profile globally for the next several decades. The vision of India racing to be the third largest global economic power by 2035 is tempered by the multitudes of social, economic and industrial inequities and constraints that India has to grapple with.
Rational thoughts, national missions
One can think of several national missions which the social networking communities can contribute to. Enhancing online education, including support systems for parents and educational institutions, especially at primary and secondary levels could be one important, in fact the first and foremost, national mission. Providing market and technology outreach for micro and small enterprises could be a second critical mission that could promote self-reliance and entrepreneurship. Development of national policy initiatives and programs based on community experiences could be a third important mission. Open source collaboration for upgradation of industrial products and business services could be a fourth mission. Cultural transformation to attain the highest levels of national comparative advantage in terms of innovation, quality and productivity, on the lines of Japan, could be a fifth vital mission.
Making India an equitable, safe, ecologically conscious welfare state could be the sixth important national mission. Women empowerment in all walks of life and enabling them to assume leadership roles in the business and industry could be the seventh mission. Agrarian uplift, enabling the indigent farmer, manage a positive rural economy is the eight mission. Geriatric care with healthcare taken up by voluntary and government contributions is very much a need of the hour. And finally, balanced child nutrition, including, free food for all indigent day care babies and school going children would boost the nation's health and literacy levels even further.
Five points of transformation
The ten national missions may seem overwhelming at first sight but can be tackled by mass voluntary drive of the educated and employed population, which characterizes the core of the social networking movement. This, however, requires a paradigm shift in the approach to, and use of, social networking. We have considered that the current social networking phenomenon is driven by five individual behavioral patterns: See the Face, Explore the Uncertain, Share the Past, Bridge the Distance and Form the Community. While these would continue to drive the social networking phenomenon, expansion of the network to create even greater levels of social energy and focused channeling of the social energy to national missions would require five additional behavioral underpinnings. These are: Absorb the Mission, Share the Passion, Innovate the Future, Bridge the Divide and Institutionalize the Change.
Absorb the Mission
It is important that socially conscious and nationally driven social citizens of the Net give wide exposure to national missions. The Times Group of India launched a Teach India awareness and voluntary participation campaign to a considerable degree of success. The above ten national missions with further detailing could become significant value propositions. Collaborating with the social networking sites for additional infrastructure and visibility support can help the social netizens see and absorb the national missions.
Share the Passion
If the current social networking is driven by an enthusiasm to connect and belong, the national missions can be fulfilled only by a passion to contribute to national upliftment. This would require that the networked citizens understand and analyze their own competencies and capabilities and are fired by a passion to share these with the needy country men and women. Such passion should be shared by the discrete communities so that the ability to contribute is reinforced.
Innovate the Future
Visibility and passion need to be supplemented with innovation to fulfill the missions. Conventional thinking and traditional structures as well as existing products and services are unlikely to be either time-efficient or cost-effective for social netizens to contribute. Creation of dedicated portals, tie-ups with device makers, development of customized products, dissemination of case studies could all add up to a powerful impact. In addition, more open source technology platforms could provide a great fillip to national innovation.
Bridge the Divide
National missions ought to fulfill two important purposes. Firstly, they must enable, empower, and enrich the downtrodden and needy members of the society, strengthening the social firmament. Secondly, they must reinforce the competitive and comparative advantages of the nation on par with the best in the world. The first objective to a large measure would support the second objective but the second objective would also require a much larger spread in the industry and the economy. Clearly, network communities must channel themselves into dedicated missions as well as target groups to achieve optimal impact.
Institutionalize the Change
Nation building cannot be a onetime initiative in time. Given the global coupling and given also the endeavors by other BRICS and MINT nations to compete in the global arena even while the developed blocks of USA, Canada, Europe, Australia and Japan seek to retain their edge, nation building has to be a continuous movement. Also, each positive change must be institutionalized and new changes systemically integrated. Korea is a fine example of fulfillment of national missions and their institutionalization thereof.
Finite time, infinite options
One of the striking features of the modern day globally networked world is the myriad number of industrial, business, social and economic options that arise each day. The world is also characterized by an increasing emphasis on entertainment, media and services. As a result, manufacturing and agriculture seem to be losing their share in the economy. At the same time, a greater proportion of the young and mobile population is getting increasingly obsessed with lifestyle activities and entertainment technologies. While even such leisure time activities require and generate their own cascades of industrial and economic activities, it is important that a nation maintains a balanced mix of all sectors. The socially networked youth also requires to develop its own balance of aptitude for multiple technologies and avocations.
Under the paradigm suggested herein, the social netizens would need to display an innovation, quality and productivity driven mind-set of nation building through fulfillment of critical national missions. Rather than merely be overawed by the time consuming and entertaining nature of the social networking technologies and sites, the young generation should, at the minimum, use a certain part of their 'facebook' time for nationally productive activities and at the optimum question themselves as to why the smart, cyber-navigating generation of India cannot have their own Facebooks, Twitters and Google+s for national competitiveness.
Posted by Dr CB Rao on November 22, 2011.
Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts
Tuesday, November 22, 2011
Thursday, January 14, 2010
Nano to Mega Entrepreneurial Spectrum: Need for Financial Entrepreneurs
Enterprises emerge from entrepreneurial energy. Entrepreneurs fight against odds to create entities that can convert ideas into products or services. An entrepreneurial journey involves several challenges including, but not limited to, the conceptualization of the entrepreneurial initiative, arrangement of finances, assembling of the team, establishment of the project, delivery the product or service and finally earning of reasonable returns to please the shareholders. These core, critical steps in the journey of an entrepreneurial enterprise also need to be consistent with the capabilities and potential of the entrepreneur. There is little clarity on when and how the challenge for entrepreneurial journey ends and the quest for enterprise sustainability commences.
The popular appreciation of entrepreneurial effort tends to be limited to first generation enterprises which have achieved scale and scope, with high visibility in media. Despite such enterprises achieving a significant success relative to the starting milestones, the pressures are ever higher on them to grow beyond boundaries, in a virtually limitless process. In this endeavor, the true creative spirit of an entrepreneurial venture gets overwhelmed by the clinical intellect and aggressive force of such companies pursuing scale and scope. Pursuit of scale and scope no doubt transforms the entrepreneurs heading such firms into global business leaders but also limits them from institutionalizing their intellectual talent on a wider entrepreneurial base, as a national comparative advantage.
Infosys insight; foresight for growth
A brief study of Infosys Technologies Limited, India’s leading information technology corporation, and their founders offers certain unique insights and possibilities in this complex interplay of enterprise and entrepreneurship. Infosys was founded in 1981 with a very modest capital of USD 250 by a team of seven software engineers, led by the founder N R Narayana Murthy. The company was in many ways a pioneer in leveraging Indian software talent for providing global information technology solutions. With a singular focus and a creative global delivery model, Infosys never had to look back in its growth journey. Today, Infosys is a NASDAQ listed global IT and Consulting Services corporation with 105,000 employees, revenues of US$ 4 billion and market capitalization of approximately US$ 27 billion.
Of the seven founders, N S Raghavan retired from the services of Infosys in 1999 as its joint managing director and went on to become a mentor for several entrepreneurs. N R Narayana Murthy continued to nurture Infosys into a global corporation as its chairman, and more recently as its chief mentor. Logically, a large global corporation such as Infosys with excellent revenue and profitability would have the ability to encourage entrepreneurial entities all across its value chain, and possibly would have created platforms for various entrepreneurs dock in with the company. Yet, N R Narayana Murthy has recently set up a Rs 6 billion (USD 133 million) venture capital fund called Catamaran Investment Pvt Limited, headed by him to encourage entrepreneurial venture, across sectors.
The establishment of the Murthy-Catamaran venture implies that even a global company cannot do more than encourage ancillary entity development in its own value chain, while an entrepreneur who grew such a company can possibly contribute to more broad-based entrepreneurial development as an entrepreneur rather than as a corporate honcho. Indications are that Catamaran would be sector and scale agnostic while investing, which is an encouraging sign. Going beyond Infosys and N R Narayana Murthy, however, one needs to recognize that entrepreneurial development could occur in different configurations and formats. Entrepreneurs who tasted success have now the opportunity and option to provide a discrete institutional structure, distinct from the firms that they founded and grew, to provide a genuine and powerful thrust to entrepreneurial development in the country.
Scaling and scoping; pathway to growth
Any enterprise emerges and grows on only two fundamental dimensions: product (service included) and market (geography or customer segment included). Depending on the product range and market spread enterprises get positioned in terms of scale and scope. The modernization of the corporation on a number of collateral and enabling factors such as technology and organization has to only serve these two fundamentals. While the entrepreneurial spirit of discovery of product and market niche has always been an integral part of social and economic development, the emergence of the modern corporation has sought to substitute that spirit with systematic quest.
It is imperative that entrepreneurial effort is viewed independent of scale and scope as the overwhelming factors on one hand, and technology and organization as the differentiating factors on the other. India has traditionally given considerable importance to the development of cottage and small scale industries, essentially through investment and tax incentives. Evolution of large scale industry has been seen as a logical pull for further development of such smaller enterprises. Yet, the whole cottage and small scale enterprise movement has got grounded over the years due to the enterprises failing to appreciate the product-market interplay. There is a need to redefine the enterprise hierarchy to identify where and how different generations of entrepreneurial effort fit best.
From nano to mega; a wide enterprise spectrum
Entities which cater to one product group and one small homogenous market segment are best termed as nano enterprises. We see nano enterprises all around us but fail to appreciate how the entrepreneurial effort is surviving despite lack of attention to it by the formal economic system. The vegetable cart vendor who serves the neighborhood homes, the tailor who meets the clothing needs of the location and the corner grocery shop which provides the food and family items, for example, constitute nano enterprises. A nano enterprise is usually operated by only one individual, the founder or the owner.
A printer who prints multiple products for multiple clients with a printing machine and a small team of assistants, a restaurant which provides multiple cuisines for a multi-ethnic population, a boutique which caters to multiple clothing styles constitute the next level of micro enterprises. When these are upgraded to a network in each case with better technology and logistics support for larger multi-location coverage they become small scale firms; a desktop networked printer, a chain of restaurants and a designer clothing studio cum boutique, for example.
A publishing cum printing house, a pan-Indian fast foods restaurant and an apparel manufacturing company all of which in modern times require modern technologies, trained work force and capable management represent medium scale enterprises. All listed national companies with highly organized research, manufacturing and marketing capabilities are the typical large companies; for example, a multimedia corporation with core competencies in print or television media, a ready-to-eat foods company and an end-to-end textile and apparel company. Blue chip companies and giant corporations in diverse industrial segments corporations, with global scale and scope, constitute mega corporations.
The efficiency with which each enterprise operates (for example, the number of households the vegetable vendor can cater to in a day) and the speed with which a firm can morph from one stage to the next higher stages (for example, leap from being a cart vendor, grocery shop and tailor to becoming a retail chain) is a function of entrepreneurial energy, duly supported by finance and management. The indigent nano entrepreneur, if equipped with a semi-motorized cart, can cover more neighborhoods. Finance and management can make an aggressive local retailer become a national multi-brand retail chain.
Idea to enterprise; passion to performance
From the yesteryears’ business magazine idea to yesterday’s direct-to-home television, true entrepreneurial effort is not one of a product or service whose time has come but of an idea which has been thought of ahead of its time. With the explosion in knowledge levels and the implosion in customer needs there exist today far more product and service ideas than at any point of history. Mentorship and financing are two critical inputs which can help the nano, micro and small enterprises get established first, and later become medium, large and mega enterprises. While large firms have the necessary track record and competencies to raise resources for new entrepreneurial ventures in their quest for growth, nano, micro and small firms need explicit, dedicated and empathetic support.
India does not have angel investors. The financing and investment eco-system in India is not specifically geared to spot entrepreneurs and help them translate their ideas into enterprises or organized activities. Established venture capital firms and private equity funds cater to large firms, and only occasionally to medium firms. In India, nano, micro and small firms can emerge and survive only based on conservative bank priority funding. India therefore needs a wholly new genre of entrepreneurial financing, whether it is a uniquely Indian type or an established Western type. There is a need for a new breed of financial entrepreneurs to emerge to lead a whole new entrepreneurial revolution in India. Several alternative models, all of them, relevant to different types of entrepreneurial initiatives need to be simultaneously considered.
(a) Individual financing model
The ability to finance nano entrepreneurial ventures exists among all earning members of the society, especially the high net worth individuals (HNIs). The investment required for a vegetable vendor to acquire a modern cart, for a tailor to add a multi-purpose sewing machine and the corner grocery shop to have its own brand of home foods would not exceed Rs 10,000 in each case, which amount is entirely within the means of any earning individual with high savings potential. HNIs more particularly could keep a target of creating a nano-entrepreneurial venture each year and leave their stamp on the history of entrepreneurial development. Even retired personnel can reinvest a small part of their retirement proceedings to set up their own nano enterprises, be it a corner shop or a core service for the community.
Extending the concept further, gated communities and apartment associations which would have a larger access to collective resources and provide a captive user need basket can help establish nano-entrepreneurial ventures that meet the community needs effectively. From a security service to a mechanized laundry and from a library service to a documentation service, opportunities for creation of nano ventures by residential communities are indeed plenty. As these gated communities develop into new suburbs and mini-cities the nano and micro foundations of business can indeed grow over time.
(b) Corporate catalyst model
Major corporations, given their organizational infrastructure and market reach as well as their financial capability can contribute impressively to the entrepreneurial movement directly and indirectly. The logical way, as discussed in an earlier post, is to convert or let go fragments of their value chain or operational spectrum as nano- or micro-entrepreneurial ventures. This is a natural and economical way of creating entrepreneurial value while enhancing cost-competitive position of the company. Each function or domain of a firm, for example, research, manufacturing, marketing, supply chain, human resources, accounting, information technology and clinical trials offers scope for creating entrepreneurial outfits for outsourcing of fragments of such domains.
Yet another way is to leverage a corporation’s resources to reach out to wider population, create awareness and harness passion, in association with Non-Governmental Organizations (NGOs) and Not for Profit Organizations (NPOs). The success of the Teach India 2009 campaign organized by the Times of India media group in association with select NGOs in bringing together educated experts to teach underprivileged children is proof enough. Corporations can undertake equal aplomb entrepreneurial initiatives utilizing their resources. In addition to individual corporations industry associations such as FICCI, CII and ASSOCHAM can play a catalyst role by creating divisions for entrepreneurial projects.
(c) Not-for-profit organization model
Not-for-profit organizations (NPOs) headed by passionate leaders can spur and support entrepreneurial initiatives. Bharat Yuva Shakti Trust (BYST) is a trend setting model in this context. BYST is a non-profit organization headed by Lakshmi Venkatesan and set up for providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans, mentoring, networking and marketing. The young micro-entrepreneurs are nurtured until they reach a level where they are not only self-sufficient, but they in turn make a valuable contribution to the society through creating wealth and employment.
Nationally, BYST has supported 1900 micro-entrepreneurial ventures, employing over 20,000 people and providing training to over 75,000 people. BYST has both rural and urban training programs covering six major regions of India. The Confederation of India provides the infrastructure and administrative support to BYST. BYST is also networked with international organizations that are aligned to similar objectives. A high point of BYST is its ability to bring business and industry experts into its programs of mentorship for the micro-entrepreneurs. This “beyond the financing” strategy provides the requisites competencies to the micro-entrepreneurs and enables sustainability to their ventures. For a country as large as India, there is potential for many more NPOs organized on the model of BYST to support nano and micro enterprises.
(d) Microfinance corporation model
The Grameen Bank was founded by Muhammad Yunus in Bangla Desh to provide tiny loans for the poor to enable self-employment. The success of the Grameen Bank and the global recognition it secured is reflective of the potential of directed micro credit. Over a period of 12 years, the Bank created over 6 million active borrowers disbursing over 900 million in tiny loans. The pioneering work in employment generation touching the lives of the poorest of the poor fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006. Today the Grameen Bank has become more diversified in its product offerings, leading to greater generation of wealth for its customers.
Extending the concept further, a bank dedicated for creation of micro-entrepreneurial enterprises can lead to creation of millions of micro enterprises in India. Potentially, banks and specialized institutions such as Small Industries Development Bank of India can lead this micro-enterprise initiative by transforming their respective priority banking arms into divisions of nano finance and micro finance for appropriately scaled entrepreneurial enterprises, with a new direction. While rural banks did get set up in India even decades ago, their inability to lead an entrepreneurial revolution is related to adoption of policy driven big bank mores rather than entrepreneurial risk taking approaches. A new format and approach for micro finance corporations is called for in India.
(e) The Murthy-Catamaran model
The Catamaran Venture Capital fund was set up by Infosys founder, NR Narayana Murthy and his wife Sudha Murthy by selling their shares constituting a small part of their shareholding in Infosys to raise Rs 6 billion (USD 133 million). This amounted to 0.43 percent of the total capital of Infosys. The move by Narayana Murthy is a trend setter for successful entrepreneurs to share their wealth and expertise to reinvest in others’ entrepreneurial ideas and create wealth for others and the society. The companies listed in the National Stock Exchange of India have a combined market capitalization of over USD 1 trillion. A sale of even 0.5 percent of the capital could lead to a massive USD 5 billion fund that could be set up to several Catamaran style venture capital funds.
Assuming that promoters have on average over 25 percent of the overall capital structure of the listed companies, successful entrepreneur heads of Indian corporations have in their hands a huge funding potential to support millions of micro, small and medium scale entrepreneurial enterprises. It is hoped that the entrepreneur-heads of all listed companies, including public sector undertakings would dedicate at least 0.5 percent of their respective companies’ shareholding to support entrepreneurial ventures. When this scale of finance is coupled with their personal commitment to mentor budding entrepreneurs a sea change would occur on the entrepreneurial scene. It is to be hoped that several other successful entrepreneurs as well as corporate group heads would replicate or improve upon the Catamaran model.
(f) Western venture capital model
Venture capital firms entered the Indian industrial scene in the 1990s in a big way along with the economic policy liberalization. Their entry was pursuant to a decision of the Government of India to allow foreign finance companies take stakes in the Indian companies. Taking small stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies, venture capital firms enabled a number of first generation enterprises strengthen their equity structures and also list themselves on the bourses. Venture capital funds enable companies achieve the crucial leap from a modest beginning to a modern era, accessing technologies or markets through their financing. As companies are not typically listed at that stage, venture capital firms take stake based on stock pricing negotiated with the promoters.
While venture capital firms serve a valuable purpose their emphasis on growth and exit at attractive valuations, through listing or further sale to other strategic investors tends to distort orderly growth of companies. Typically, venture capital firms help establish medium scale enterprises with their investments ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on sunrise and entrepreneurially driven sectors. India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments. Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology, nanotechnology, healthcare, education, alternative fuels and clean technologies, providing confidence to entrepreneurs move into such sectors. That said, unless the Western venture capital funds tie up with Indian groups the ability to take risks relevant to the Indian scenario could be weak.
(g) Global private equity model
While venture capital and private equity funding is seen to be synonymous, private equity funds tend to favor listed companies for their investments. Most private equity firms enter established firms through preferential allotment of new shares to themselves at prices that reflect market valuations or reflect specific premiums based on their insights into business plans. While venture capital firms provide growth capital, private equity players provide funding for a variety of purposes including growth capital, capital for retiring debt, mezzanine funding and acquisition war chest. With investment ranges from USD 50 to 200 million, private equity firms can truly shape medium scale enterprises become large corporations. However, the global economic downturn of 2008 and 2009 saw the weak foundations of organized venture capital and private equity industries.
The established private equity industry has global investors. Their investments are subject to returns to their investors, some of them extremely large and powerful ones such as global pension funds. In good times these private equity players are nation, and sector agnostic, seek a diversified investment portfolio and display a penchant for globalization of their portfolio firms. In difficult times, however, they tend to be extremely cautious. It is time that Indian financial institutions, gratuity and pension funds, mutual funds and provident funds as well as large public and private sector groups created India’s own private equity behemoths.
(h) State as super equity player
As large firms grow larger, many grow beyond the reach of even large private equity players. Large firms and private equity players manage the situation be creating subsidiaries for newer activities and channeling equity flows. In countries such as India where government owned public sector undertakings (PSUs) occupy commanding heights of the economy State has to assume the role of a super public equity player or venture capital player, with respect to the PSUs. Several corporations in infrastructure sector have emerged due to such public investments by the Government of India. These, in turn, have led to creation of new strengths in the economy, which the private sector or the overseas players would have considered to be either beyond their means or their risk profile.
While a school of thought questions the efficiency and appropriateness of a large PSU sector, there is no denying that but for such investments many mega corporations in oil, gas, refining, power, power equipment, locomotives and other investment intensive sectors would not have been established. The induction of new technologies and establishment of new industries with uncertain commercialization opportunities requires massive investments which only governments are willing to make. The Government of India’s disinvestment plans could unlock e easily USD 10 to 20 billion depending on the PSUs chosen for disinvestment and stake sale levels. Though the Government plans to dedicate the proceeds to social service programs it would be equally logical to channel at least 50 percent of the proceeds to setting up new PSUs in long gestation, high technology sunrise sectors. Such an approach would provide technological assurance and employment security to the nation. An alternative could be for the listed PSUs to issue additional shares at premium to strategic investors and initiate such new generation enterprises.
(i) Government policy liberalization
Indian Government has helped the growth of medium and large scale sector by the policies of economic liberalization initiated in 1992. Despite continued prevarication over the last few years, further liberalization is expected with a special focus on infrastructure sectors, supporting high capacity entrepreneurial investment by Indian and foreign corporations. Yet, liberalization policies in projects of social infrastructure continue to be bureaucratically governed with the objectives of supervising quality, eliminating exploitation and protecting public safety. Projects in sectors such as education, transport, healthcare, banking and retail are singularly affected by such policies. There is a need to find new liberalization formats that support entrepreneurial spread.
The new Companies Bill is expected to give a fillip to entrepreneurial activity with the One Person company provisions. This laudable reform in company law may not result in the desired boost to entrepreneurial activity if social infrastructure sectors are rigidly governed by bureaucratic barriers to entry. Much of the liberalization responsibility in this sphere rests on the State Governments as well. The governments need to establish single windows to facilitate setting up of One Person companies in a host of fields. The objectives of ensuring quality and safety are better served by establishing technology bodies to supervise quality and safety rather than by controlling entry.
Summary
Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope. From nano to mega, enterprises can be positioned and grown depending on the applicable product-market scope in each case. While there are several financing models available to finance varied types of entrepreneurial ventures, the new Catamaran venture capital model being pioneered by N R Narayana Murthy, the founder of Infosys is of great significance. This model involves successful investors raising money by selling a small portion of their holdings to set up venture capital entities which will offer not only finance but mentorship by the successful entrepreneurs. Individuals and corporations can also play catalytic roles in enabling entrepreneurial ventures in different capacities. Also relevant are financing models of not-for-profit type and microfinance corporation type. At the other points of spectrum established venture capital funds and private equity players have to rework their models and become more entrepreneurial by themselves. Indian mutual funds, pension funds and provident fund organizations as well as corporate groups have to set up India’s own venture capital and private sector funds. At the apex level the Government has to rediscover its role as a super venture capital investor, gaining additional financial capability from the envisaged PSU disinvestment program. Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano, micro, small, medium, large and mega entrepreneurial entities in India.
Posted by Dr CB Rao on January 14, 2010
The popular appreciation of entrepreneurial effort tends to be limited to first generation enterprises which have achieved scale and scope, with high visibility in media. Despite such enterprises achieving a significant success relative to the starting milestones, the pressures are ever higher on them to grow beyond boundaries, in a virtually limitless process. In this endeavor, the true creative spirit of an entrepreneurial venture gets overwhelmed by the clinical intellect and aggressive force of such companies pursuing scale and scope. Pursuit of scale and scope no doubt transforms the entrepreneurs heading such firms into global business leaders but also limits them from institutionalizing their intellectual talent on a wider entrepreneurial base, as a national comparative advantage.
Infosys insight; foresight for growth
A brief study of Infosys Technologies Limited, India’s leading information technology corporation, and their founders offers certain unique insights and possibilities in this complex interplay of enterprise and entrepreneurship. Infosys was founded in 1981 with a very modest capital of USD 250 by a team of seven software engineers, led by the founder N R Narayana Murthy. The company was in many ways a pioneer in leveraging Indian software talent for providing global information technology solutions. With a singular focus and a creative global delivery model, Infosys never had to look back in its growth journey. Today, Infosys is a NASDAQ listed global IT and Consulting Services corporation with 105,000 employees, revenues of US$ 4 billion and market capitalization of approximately US$ 27 billion.
Of the seven founders, N S Raghavan retired from the services of Infosys in 1999 as its joint managing director and went on to become a mentor for several entrepreneurs. N R Narayana Murthy continued to nurture Infosys into a global corporation as its chairman, and more recently as its chief mentor. Logically, a large global corporation such as Infosys with excellent revenue and profitability would have the ability to encourage entrepreneurial entities all across its value chain, and possibly would have created platforms for various entrepreneurs dock in with the company. Yet, N R Narayana Murthy has recently set up a Rs 6 billion (USD 133 million) venture capital fund called Catamaran Investment Pvt Limited, headed by him to encourage entrepreneurial venture, across sectors.
The establishment of the Murthy-Catamaran venture implies that even a global company cannot do more than encourage ancillary entity development in its own value chain, while an entrepreneur who grew such a company can possibly contribute to more broad-based entrepreneurial development as an entrepreneur rather than as a corporate honcho. Indications are that Catamaran would be sector and scale agnostic while investing, which is an encouraging sign. Going beyond Infosys and N R Narayana Murthy, however, one needs to recognize that entrepreneurial development could occur in different configurations and formats. Entrepreneurs who tasted success have now the opportunity and option to provide a discrete institutional structure, distinct from the firms that they founded and grew, to provide a genuine and powerful thrust to entrepreneurial development in the country.
Scaling and scoping; pathway to growth
Any enterprise emerges and grows on only two fundamental dimensions: product (service included) and market (geography or customer segment included). Depending on the product range and market spread enterprises get positioned in terms of scale and scope. The modernization of the corporation on a number of collateral and enabling factors such as technology and organization has to only serve these two fundamentals. While the entrepreneurial spirit of discovery of product and market niche has always been an integral part of social and economic development, the emergence of the modern corporation has sought to substitute that spirit with systematic quest.
It is imperative that entrepreneurial effort is viewed independent of scale and scope as the overwhelming factors on one hand, and technology and organization as the differentiating factors on the other. India has traditionally given considerable importance to the development of cottage and small scale industries, essentially through investment and tax incentives. Evolution of large scale industry has been seen as a logical pull for further development of such smaller enterprises. Yet, the whole cottage and small scale enterprise movement has got grounded over the years due to the enterprises failing to appreciate the product-market interplay. There is a need to redefine the enterprise hierarchy to identify where and how different generations of entrepreneurial effort fit best.
From nano to mega; a wide enterprise spectrum
Entities which cater to one product group and one small homogenous market segment are best termed as nano enterprises. We see nano enterprises all around us but fail to appreciate how the entrepreneurial effort is surviving despite lack of attention to it by the formal economic system. The vegetable cart vendor who serves the neighborhood homes, the tailor who meets the clothing needs of the location and the corner grocery shop which provides the food and family items, for example, constitute nano enterprises. A nano enterprise is usually operated by only one individual, the founder or the owner.
A printer who prints multiple products for multiple clients with a printing machine and a small team of assistants, a restaurant which provides multiple cuisines for a multi-ethnic population, a boutique which caters to multiple clothing styles constitute the next level of micro enterprises. When these are upgraded to a network in each case with better technology and logistics support for larger multi-location coverage they become small scale firms; a desktop networked printer, a chain of restaurants and a designer clothing studio cum boutique, for example.
A publishing cum printing house, a pan-Indian fast foods restaurant and an apparel manufacturing company all of which in modern times require modern technologies, trained work force and capable management represent medium scale enterprises. All listed national companies with highly organized research, manufacturing and marketing capabilities are the typical large companies; for example, a multimedia corporation with core competencies in print or television media, a ready-to-eat foods company and an end-to-end textile and apparel company. Blue chip companies and giant corporations in diverse industrial segments corporations, with global scale and scope, constitute mega corporations.
The efficiency with which each enterprise operates (for example, the number of households the vegetable vendor can cater to in a day) and the speed with which a firm can morph from one stage to the next higher stages (for example, leap from being a cart vendor, grocery shop and tailor to becoming a retail chain) is a function of entrepreneurial energy, duly supported by finance and management. The indigent nano entrepreneur, if equipped with a semi-motorized cart, can cover more neighborhoods. Finance and management can make an aggressive local retailer become a national multi-brand retail chain.
Idea to enterprise; passion to performance
From the yesteryears’ business magazine idea to yesterday’s direct-to-home television, true entrepreneurial effort is not one of a product or service whose time has come but of an idea which has been thought of ahead of its time. With the explosion in knowledge levels and the implosion in customer needs there exist today far more product and service ideas than at any point of history. Mentorship and financing are two critical inputs which can help the nano, micro and small enterprises get established first, and later become medium, large and mega enterprises. While large firms have the necessary track record and competencies to raise resources for new entrepreneurial ventures in their quest for growth, nano, micro and small firms need explicit, dedicated and empathetic support.
India does not have angel investors. The financing and investment eco-system in India is not specifically geared to spot entrepreneurs and help them translate their ideas into enterprises or organized activities. Established venture capital firms and private equity funds cater to large firms, and only occasionally to medium firms. In India, nano, micro and small firms can emerge and survive only based on conservative bank priority funding. India therefore needs a wholly new genre of entrepreneurial financing, whether it is a uniquely Indian type or an established Western type. There is a need for a new breed of financial entrepreneurs to emerge to lead a whole new entrepreneurial revolution in India. Several alternative models, all of them, relevant to different types of entrepreneurial initiatives need to be simultaneously considered.
(a) Individual financing model
The ability to finance nano entrepreneurial ventures exists among all earning members of the society, especially the high net worth individuals (HNIs). The investment required for a vegetable vendor to acquire a modern cart, for a tailor to add a multi-purpose sewing machine and the corner grocery shop to have its own brand of home foods would not exceed Rs 10,000 in each case, which amount is entirely within the means of any earning individual with high savings potential. HNIs more particularly could keep a target of creating a nano-entrepreneurial venture each year and leave their stamp on the history of entrepreneurial development. Even retired personnel can reinvest a small part of their retirement proceedings to set up their own nano enterprises, be it a corner shop or a core service for the community.
Extending the concept further, gated communities and apartment associations which would have a larger access to collective resources and provide a captive user need basket can help establish nano-entrepreneurial ventures that meet the community needs effectively. From a security service to a mechanized laundry and from a library service to a documentation service, opportunities for creation of nano ventures by residential communities are indeed plenty. As these gated communities develop into new suburbs and mini-cities the nano and micro foundations of business can indeed grow over time.
(b) Corporate catalyst model
Major corporations, given their organizational infrastructure and market reach as well as their financial capability can contribute impressively to the entrepreneurial movement directly and indirectly. The logical way, as discussed in an earlier post, is to convert or let go fragments of their value chain or operational spectrum as nano- or micro-entrepreneurial ventures. This is a natural and economical way of creating entrepreneurial value while enhancing cost-competitive position of the company. Each function or domain of a firm, for example, research, manufacturing, marketing, supply chain, human resources, accounting, information technology and clinical trials offers scope for creating entrepreneurial outfits for outsourcing of fragments of such domains.
Yet another way is to leverage a corporation’s resources to reach out to wider population, create awareness and harness passion, in association with Non-Governmental Organizations (NGOs) and Not for Profit Organizations (NPOs). The success of the Teach India 2009 campaign organized by the Times of India media group in association with select NGOs in bringing together educated experts to teach underprivileged children is proof enough. Corporations can undertake equal aplomb entrepreneurial initiatives utilizing their resources. In addition to individual corporations industry associations such as FICCI, CII and ASSOCHAM can play a catalyst role by creating divisions for entrepreneurial projects.
(c) Not-for-profit organization model
Not-for-profit organizations (NPOs) headed by passionate leaders can spur and support entrepreneurial initiatives. Bharat Yuva Shakti Trust (BYST) is a trend setting model in this context. BYST is a non-profit organization headed by Lakshmi Venkatesan and set up for providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans, mentoring, networking and marketing. The young micro-entrepreneurs are nurtured until they reach a level where they are not only self-sufficient, but they in turn make a valuable contribution to the society through creating wealth and employment.
Nationally, BYST has supported 1900 micro-entrepreneurial ventures, employing over 20,000 people and providing training to over 75,000 people. BYST has both rural and urban training programs covering six major regions of India. The Confederation of India provides the infrastructure and administrative support to BYST. BYST is also networked with international organizations that are aligned to similar objectives. A high point of BYST is its ability to bring business and industry experts into its programs of mentorship for the micro-entrepreneurs. This “beyond the financing” strategy provides the requisites competencies to the micro-entrepreneurs and enables sustainability to their ventures. For a country as large as India, there is potential for many more NPOs organized on the model of BYST to support nano and micro enterprises.
(d) Microfinance corporation model
The Grameen Bank was founded by Muhammad Yunus in Bangla Desh to provide tiny loans for the poor to enable self-employment. The success of the Grameen Bank and the global recognition it secured is reflective of the potential of directed micro credit. Over a period of 12 years, the Bank created over 6 million active borrowers disbursing over 900 million in tiny loans. The pioneering work in employment generation touching the lives of the poorest of the poor fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006. Today the Grameen Bank has become more diversified in its product offerings, leading to greater generation of wealth for its customers.
Extending the concept further, a bank dedicated for creation of micro-entrepreneurial enterprises can lead to creation of millions of micro enterprises in India. Potentially, banks and specialized institutions such as Small Industries Development Bank of India can lead this micro-enterprise initiative by transforming their respective priority banking arms into divisions of nano finance and micro finance for appropriately scaled entrepreneurial enterprises, with a new direction. While rural banks did get set up in India even decades ago, their inability to lead an entrepreneurial revolution is related to adoption of policy driven big bank mores rather than entrepreneurial risk taking approaches. A new format and approach for micro finance corporations is called for in India.
(e) The Murthy-Catamaran model
The Catamaran Venture Capital fund was set up by Infosys founder, NR Narayana Murthy and his wife Sudha Murthy by selling their shares constituting a small part of their shareholding in Infosys to raise Rs 6 billion (USD 133 million). This amounted to 0.43 percent of the total capital of Infosys. The move by Narayana Murthy is a trend setter for successful entrepreneurs to share their wealth and expertise to reinvest in others’ entrepreneurial ideas and create wealth for others and the society. The companies listed in the National Stock Exchange of India have a combined market capitalization of over USD 1 trillion. A sale of even 0.5 percent of the capital could lead to a massive USD 5 billion fund that could be set up to several Catamaran style venture capital funds.
Assuming that promoters have on average over 25 percent of the overall capital structure of the listed companies, successful entrepreneur heads of Indian corporations have in their hands a huge funding potential to support millions of micro, small and medium scale entrepreneurial enterprises. It is hoped that the entrepreneur-heads of all listed companies, including public sector undertakings would dedicate at least 0.5 percent of their respective companies’ shareholding to support entrepreneurial ventures. When this scale of finance is coupled with their personal commitment to mentor budding entrepreneurs a sea change would occur on the entrepreneurial scene. It is to be hoped that several other successful entrepreneurs as well as corporate group heads would replicate or improve upon the Catamaran model.
(f) Western venture capital model
Venture capital firms entered the Indian industrial scene in the 1990s in a big way along with the economic policy liberalization. Their entry was pursuant to a decision of the Government of India to allow foreign finance companies take stakes in the Indian companies. Taking small stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies, venture capital firms enabled a number of first generation enterprises strengthen their equity structures and also list themselves on the bourses. Venture capital funds enable companies achieve the crucial leap from a modest beginning to a modern era, accessing technologies or markets through their financing. As companies are not typically listed at that stage, venture capital firms take stake based on stock pricing negotiated with the promoters.
While venture capital firms serve a valuable purpose their emphasis on growth and exit at attractive valuations, through listing or further sale to other strategic investors tends to distort orderly growth of companies. Typically, venture capital firms help establish medium scale enterprises with their investments ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on sunrise and entrepreneurially driven sectors. India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments. Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology, nanotechnology, healthcare, education, alternative fuels and clean technologies, providing confidence to entrepreneurs move into such sectors. That said, unless the Western venture capital funds tie up with Indian groups the ability to take risks relevant to the Indian scenario could be weak.
(g) Global private equity model
While venture capital and private equity funding is seen to be synonymous, private equity funds tend to favor listed companies for their investments. Most private equity firms enter established firms through preferential allotment of new shares to themselves at prices that reflect market valuations or reflect specific premiums based on their insights into business plans. While venture capital firms provide growth capital, private equity players provide funding for a variety of purposes including growth capital, capital for retiring debt, mezzanine funding and acquisition war chest. With investment ranges from USD 50 to 200 million, private equity firms can truly shape medium scale enterprises become large corporations. However, the global economic downturn of 2008 and 2009 saw the weak foundations of organized venture capital and private equity industries.
The established private equity industry has global investors. Their investments are subject to returns to their investors, some of them extremely large and powerful ones such as global pension funds. In good times these private equity players are nation, and sector agnostic, seek a diversified investment portfolio and display a penchant for globalization of their portfolio firms. In difficult times, however, they tend to be extremely cautious. It is time that Indian financial institutions, gratuity and pension funds, mutual funds and provident funds as well as large public and private sector groups created India’s own private equity behemoths.
(h) State as super equity player
As large firms grow larger, many grow beyond the reach of even large private equity players. Large firms and private equity players manage the situation be creating subsidiaries for newer activities and channeling equity flows. In countries such as India where government owned public sector undertakings (PSUs) occupy commanding heights of the economy State has to assume the role of a super public equity player or venture capital player, with respect to the PSUs. Several corporations in infrastructure sector have emerged due to such public investments by the Government of India. These, in turn, have led to creation of new strengths in the economy, which the private sector or the overseas players would have considered to be either beyond their means or their risk profile.
While a school of thought questions the efficiency and appropriateness of a large PSU sector, there is no denying that but for such investments many mega corporations in oil, gas, refining, power, power equipment, locomotives and other investment intensive sectors would not have been established. The induction of new technologies and establishment of new industries with uncertain commercialization opportunities requires massive investments which only governments are willing to make. The Government of India’s disinvestment plans could unlock e easily USD 10 to 20 billion depending on the PSUs chosen for disinvestment and stake sale levels. Though the Government plans to dedicate the proceeds to social service programs it would be equally logical to channel at least 50 percent of the proceeds to setting up new PSUs in long gestation, high technology sunrise sectors. Such an approach would provide technological assurance and employment security to the nation. An alternative could be for the listed PSUs to issue additional shares at premium to strategic investors and initiate such new generation enterprises.
(i) Government policy liberalization
Indian Government has helped the growth of medium and large scale sector by the policies of economic liberalization initiated in 1992. Despite continued prevarication over the last few years, further liberalization is expected with a special focus on infrastructure sectors, supporting high capacity entrepreneurial investment by Indian and foreign corporations. Yet, liberalization policies in projects of social infrastructure continue to be bureaucratically governed with the objectives of supervising quality, eliminating exploitation and protecting public safety. Projects in sectors such as education, transport, healthcare, banking and retail are singularly affected by such policies. There is a need to find new liberalization formats that support entrepreneurial spread.
The new Companies Bill is expected to give a fillip to entrepreneurial activity with the One Person company provisions. This laudable reform in company law may not result in the desired boost to entrepreneurial activity if social infrastructure sectors are rigidly governed by bureaucratic barriers to entry. Much of the liberalization responsibility in this sphere rests on the State Governments as well. The governments need to establish single windows to facilitate setting up of One Person companies in a host of fields. The objectives of ensuring quality and safety are better served by establishing technology bodies to supervise quality and safety rather than by controlling entry.
Summary
Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope. From nano to mega, enterprises can be positioned and grown depending on the applicable product-market scope in each case. While there are several financing models available to finance varied types of entrepreneurial ventures, the new Catamaran venture capital model being pioneered by N R Narayana Murthy, the founder of Infosys is of great significance. This model involves successful investors raising money by selling a small portion of their holdings to set up venture capital entities which will offer not only finance but mentorship by the successful entrepreneurs. Individuals and corporations can also play catalytic roles in enabling entrepreneurial ventures in different capacities. Also relevant are financing models of not-for-profit type and microfinance corporation type. At the other points of spectrum established venture capital funds and private equity players have to rework their models and become more entrepreneurial by themselves. Indian mutual funds, pension funds and provident fund organizations as well as corporate groups have to set up India’s own venture capital and private sector funds. At the apex level the Government has to rediscover its role as a super venture capital investor, gaining additional financial capability from the envisaged PSU disinvestment program. Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano, micro, small, medium, large and mega entrepreneurial entities in India.
Posted by Dr CB Rao on January 14, 2010
Monday, December 29, 2008
Economic Meltdown: A Failure of Forecasting?
The severe global economic meltdown has taken the governments, corporations and public by surprise. It is even more surprising, however, that the meltdown has been preceded and accompanied by severe forecasting errors. For example, it was forecast that the crude oil will jump to USD 200 per barrel; now it is forecast that it would go as low as USD 20 per barrel. Similar gross variations between forecasts and actual levels have occurred in the currency exchange rates as well as in various economic parameters. Governments, central banks, economic agencies, consultants and experts have uniformly failed in generating forecasts that could have reasonably mirrored the likely actual levels.
Given the enormous progress made in archiving and analyzing data through information technology and the internet and the equally significant progress made in quantitative and stochastic modeling using mathematics, heuristics and simulations, the failure of forecasting is truly amazing. Perhaps one has to go back to the era of simpler models and their evolution into complex quantitative techniques to understand the reasons.
In the 1960s and 1970s, the forecasting models were based on mathematical models which analyzed a small set of past data to project a future trend. Within this, improvements were made to identify the impact of trends such as seasonality and cyclicality and smoothen the forecasts. As the quantitative capability enhanced thanks to information technology, the forecasting models became more sophisticated and moved into the domain of simulation. Eventually generic as well as domain specific simulation models, covering multiple sectors from FMCG to industrial equipment and from energy to economy, evolved.
Despite the increased sophistication, the failures of forecasting and simulation models have only increased. The reasons are many; some of which can be addressed and others which are difficult to address as discussed below.
Complexity of variables
A model is considered more sophisticated if it considers as many relevant variables as possible. Here lies the essential fallacy of complex models. Each variable is in itself dependent on a series of sub-variables and needs to be forecast based on its own simulation. As one would expect, any decrease in the forecasting efficiency of the primary variables will only decrease the accuracy of the final forecasting outcome in a multiplicative manner. And in several cases, as the variables and sub-variables arise from multiple sectors of the economy and/or multiple geographies, it is nearly impossible to achieve a uniform level of rigor in quantifying the variables and sub-variables. It is therefore necessary to limit the variables that are considered in modeling to only those that would have a significant impact on the outcomes, preferably by using ABC analysis.
Inflection Points
While identification of cyclicality and seasonality do help in generating a better model, the techniques do not help when inflection points emerge in respect of certain variables. For example, in today’s scenario purchasing power could have reached an inflection point with reference to the housing sector. The prices of commodities, especially of agricultural products could have a determining impact on the evolution of biofuel space.
Not all inflection points are economic in substance, however. Some inflection points are caused by technology. Ability to redefine the form factor of a device (whether a mobile phone or a laptop computer, or both) could substitute or combine the demand for such products each of which hitherto functioned as independent product-market segments. Ability to combine multiple functionalities in a single product could lead to generation of new product-market structures that are completely different and path-breaking. It is therefore necessary to conduct appropriate qualitative macro-economic evaluation and Delphi type technological analysis prior to embarking on detailed forecasting models.
Inflection points are hard to detect if organizations are mired in managerial dogmas. One is aware of the IBM chief’s observation made decades ago in the context of building of the first computing device that the world would not need more than a handful of computers. Cellular technology collaborators who introduced mobile telephony to India a few years ago felt that India could not support more than a few thousand cellular connections. In both these cases, separated by several decades, the dogmatic beliefs were beaten hollow by the new technology waves that these two products represented. In each case, sheer utility, affordability and proactive market segmentation led to levels of market expansion and penetration, which no forecasting models or leadership judgement could identify.
Cause-effect relationships
In today’s complex world where technological and economical factors generate lateral (and sometimes tectonic) shifts in supply side and consumption side factors, the cause-effect relationships are particularly complex to identify. These changing relationships impact the outcomes in several inexplicable ways.
The demand for oil, for example, is not determined merely by economic growth factors such as industrialization, or the infrastructure factors such as roads and automobiles but by the emergence of alternative cleaner energy sources such as biofuels, hydrogen energy, electric energy, solar energy or several combinations thereof. As seen earlier, each sector has its own variables and each variable is influenced by several sub-variables. The more pervasive, and the more multi-component a variable is, the more difficult would it be to define or quantify. Forecasting the overall demand for energy is not a sufficient solution in the alternative because, demand estimation for individual components is essential for sustainable economic and industrial planning.
Amongst all the intriguing aspects of forecasting and simulation, the cause-effect relationships are the most difficult to handle. It is important to aim at scenarios rather than specific outcomes to handle this issue.
Ignoring errors
The common perception is that forecasting is a statistically supported precise science. This has been a major contributor for the inadequate appreciation and incorrect application of this science. Forecasting is not an exact science. In fact, the subject of forecast errors is a fundamental part of the overall forecasting science. Identification of forecast errors and their sources helps the elimination of systematic deficiencies and refinement of the forecasting model.
Integration of the application domain and forecasting expertise would generate a feedback loop that helps the forecasters and users understand the benefits and limitations of forecasting with accuracy levels that should reasonably be expected. If forecasting through a model and its application in practice are treated as two different disciplines there would be no scope to study forecast errors in a real time framework. Modification of models based on a systematic study of forecast errors is essential to develop robust forecasting models.
Marketing of forecasts
Forecasts were seen in the past by the decision makers as well as lay public as guideposts for an uncertain future. Over time, these have come to be creatively positioned and eagerly lapped up by decision makers to make economic or business moves. Even lay men are increasingly basing their consumer purchase or retail investment decisions on slickly marketed forecasts.
Nowhere is this seen more evidently than in forecasts about corporate performance or stock movements. Over the last few years forecasting of corporate performance has become a “speculative science” built on the foundations of management projections and simple financial planning. The glaring absence of economic and business analysis in such forecasting is covered up under an excessive projection of the so called growth drivers and financial triggers.
At another level, analysts, institutions and agencies use forecasts as a tool to market themselves. It is a matter of concern that despite their apparent data orientation, these bodies rarely compare the forecasts with actual developments and seldom use them for effecting changes in their forecasting methodologies.
Value destroyers
In recent years, forecasting has moved into a new domain called derivatives. Based on an underlying transaction, be it related to exports or demand-supply match, calls are taken on the future course of current investments which are, indexed to forecast movements in variables such as currency exchange rates. Scores of companies have lost millions of dollars individually, and billions in the aggregate, in exotic derivative deals. It is with great wisdom and appropriate that Warren Buffet called the modern day derivatives as weapons of mass economic destruction.
Intrinsically, forecasting offers no guarantee in derivatives despite the element of “future projection” that is involved. Movements in foreign exchange rates are subject to unexpected substantial changes and volatility in macro and cross-border economic developments such as demand for dollars, foreign direct investments, balance of trade, industrial recession and so on. Even the most sophisticated experts failed to predict the drastic change in dollar-euro parity or the unrelenting strengthening of Japanese yen. No wonder then that the banks that sold exotic derivative products and the companies which bought them for attractive service fees and profit opportunities respectively are nursing huge losses.
Healing the physicians
Being in the forecasting business does not mean that the wisdom to ensure a future of certainty, and insure an uncertain future accrues through forecasting. We have the case of Goldman Sachs causing a tremor in the global economy with its dramatic forecast of USD 200 per barrel crude not so long ago. While crude is now in a rapid reverse trend towards a low that is just 15 per cent of the forecast, Goldman Sachs could not forecast the downfall of its own institution caused by its erroneous economic and asset forecasts, and related management decisions.
There appears to be a valid case for forecasters to appreciate the science of forecasting in a more temperate and holistic sense, carefully charting all the variable and sub-variable trees, understanding the inflection points and tectonic shifts, delineating cause-effect relationships and recognizing the science of forecast errors. Resisting the temptation to hyper-market forecasts or misusing them to destroy economic value, the forecasting experts have to introspect on the capabilities and the limitations of the science of forecasting, and function as reliable and sensitive guides to considered decision making by the governments, corporations and people at large.
Posted by Dr CB Rao on December 29, 2008
Friday, December 12, 2008
India and the Global Meltdown
The global economy is facing one of the most unsettling periods ever witnessed. The global financial meltdown which started in the USA is affecting the orderly economic growth of all the countries, advanced as well as emerging. As one traces the causative factors, clearly management seems to have failed economics, in a sordid saga of corporate recklessness and expansionist greed.
Economic and management professionals have long agreed on the fundamental premise that wealth creation is the sine qua non of economic growth and social equity. There have however been diametrically opposite ideological views on the pros and cons of free market economy (or capitalistic economy) versus controlled economy (or socialistic economy). The desperate moves by the governments of the free market economies to step in and part-support or part-nationalize the private financial institutions are seen by critics as a triumph of the socialistic ideology and a failure of the capitalistic philosophy.
Some critics have also been blaming the adverse developments on excessive globalization. The acute discomfort caused by the flight of global capital is seen by them as validation of the perils of globalization. However, such conclusions are not only quite simplistic but even highly erroneous. Today’s crisis is neither of ownership of wealth nor of globalization of economies but is a more fundamental misconception of what constitutes true national wealth and what signifies true global competitiveness. Sadly, management as a profession has contributed to such a misconception instead of avoiding it or correcting it.
True wealth is driven by science and technology on one hand and people and talent on the other. As many will recollect, Japan was seriously impacted in the 1980s by the collapse of its economy due to the real estate bubble and its subsequent transition to a serious deflationary mode. Yet, Japan retained its pre-eminent position as an industrially advanced nation by virtue of its fundamental leadership in science and technology. Companies, industries and nations should focus on generating true national wealth through science and technology as well as productive asset capital rather than through exotic financial instruments and mystic valuations.
Similarly, globalization is not economic Darwinism. Globalization is an opportunity for competent firms and businesses to excel with scale and scope. Emerging nations have to recognize that global resources constantly seek avenues that are more attractive and outsourcing would favour countries that demonstrate superior competitive efficiency. Advanced nations which globalize and outsource have to discover newer scientific, technological and business platforms to sustain and grow their own economies in the long term. Emerging and global economies which do not recognize this vital and maverick nature of globalization will find the advantages to be transient and its long term impact too volatile to handle.
Rather than be alarmed by these macroeconomic developments, one must use them as new opportunities. Every enterprise has to focus from the very inception on creating world-class assets which can produce high quality products and services for appropriate market needs. Business strategies need to be driven by scientific and technical competencies, be it in the form of integration, diversification or customization models. There is also need to create intellectual capital through continuous inventions and patenting of them.
The hard physical assets and the soft intellectual assets together represent true national wealth, about which companies and nations can be proud of. As India aims to become a global economic power, asset quality and business competitiveness will emerge as the key drivers. While the economic turbulence does impact organizations with a large investment-intensive asset base, the long term resilience of such organizations would eventually make them emerge stronger from such crises.
Managers must therefore focus on creating wealth through intellectual talent; wealth that is real and competitive and that endures the economic vagaries. Managers must understand how prudent business models can be built around serving customers effectively by offering products and services that meet their inherent and latent needs. More importantly, management professionals should know how to differentiate between cost reduction and value enhancement and use them as levers relevant to diverse situations.
Very often, run-of-the-mill managements get into a stupor when faced with adverse market or economic conditions; most even draw back from investing for the future. Managements must, however, recognize that a crisis presents the opportunity to undertake institutional reforms, weed out the inefficient baggage and add on value builders for the future. Firms which are able to weather the storm of recession and yet are bold enough to invest for the future are more likely to lead the growth waves of the future; they probably will rewrite the industrial structure decisively in their favour.
Indian scientists, technologists, managers and business leaders need to look to the future not in terms of today’s economic crisis or its impact on the placements, but more in terms of preparing for a challenging and exciting tomorrow where India is destined to play a major role in global economy and business, come what may. In such an evolution managerial talent coupled with an unswerving faith in technology can lead to a wave of sustainable wealth creation and competitive growth.
Posted by Dr CB Rao on December 12, 2008
Wednesday, October 22, 2008
INFRASTRUCTURE STRATEGY
INFRASTRUCTURE STRATEGY : KEY TO ECONOMIC REVIVAL
As nations and governments wilt under the impact of the global financial meltdown, acknowledged to be the deepest after the Great Depression, the strategies under development to overcome its adverse impact appear to be at best cosmetic. This is because much of the corrective action that is being taken has been to support the ailing banking system or the affected institutions. While the liquidity support measures may be an inevitable component of a rescue operation, sustainable recovery would come only through a stimulus operation. People who are familiar with the US recovery after the Great Depression and the revival of Japan after the world war, will agree that massive investments in infrastructure had been instrumental in creating a cascade of positive enhancements in all sectors of the economy, from capital goods to consumer goods and in all sectors of the society from labour market to educational system.
In today’s context, emerging countries such as India have a tremendous play to leverage infrastructure development not only to insulate the economy from the global meltdown but rather to proactively position the country as an infrastructure destination of the world. India in any case needs more highways, airports, seaports, railways (especially bullet trains), hospitals, dams, power plants, oil refineries, exploration rigs and so on. With the signing of the 123 Nuclear Agreement, the already formidable list of infrastructure projects gets boosted by the emerging need for nuclear power stations. It is imperative that the Indian government opens up its infrastructure sector even more aggressively to position India as the world’s leading destination for investments in infrastructure. The favourable trade linkages that would accrue as a result would have a positive global impact on the supportive advanced nations too.
Posted by Dr C B Rao (dated October 21, 2008)
As nations and governments wilt under the impact of the global financial meltdown, acknowledged to be the deepest after the Great Depression, the strategies under development to overcome its adverse impact appear to be at best cosmetic. This is because much of the corrective action that is being taken has been to support the ailing banking system or the affected institutions. While the liquidity support measures may be an inevitable component of a rescue operation, sustainable recovery would come only through a stimulus operation. People who are familiar with the US recovery after the Great Depression and the revival of Japan after the world war, will agree that massive investments in infrastructure had been instrumental in creating a cascade of positive enhancements in all sectors of the economy, from capital goods to consumer goods and in all sectors of the society from labour market to educational system.
In today’s context, emerging countries such as India have a tremendous play to leverage infrastructure development not only to insulate the economy from the global meltdown but rather to proactively position the country as an infrastructure destination of the world. India in any case needs more highways, airports, seaports, railways (especially bullet trains), hospitals, dams, power plants, oil refineries, exploration rigs and so on. With the signing of the 123 Nuclear Agreement, the already formidable list of infrastructure projects gets boosted by the emerging need for nuclear power stations. It is imperative that the Indian government opens up its infrastructure sector even more aggressively to position India as the world’s leading destination for investments in infrastructure. The favourable trade linkages that would accrue as a result would have a positive global impact on the supportive advanced nations too.
Posted by Dr C B Rao (dated October 21, 2008)
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