Ratio Analysis: A Relevant Tool for Emotional Fitness (Too!)

Ratio Analysis is known to students and practitioners of business, more particularly of finance, as a simple but insightful approach to measure and comparatively benchmark the state of business and operations of a firm. There are basically four ways of constructing ratios, classified as (i) coverage ratios, which are measures of a company’s ability to satisfy or meet particular obligations, (ii) return ratios, which are measures of the net benefit relative to the resources expended, (iii) turnover ratios, which are measures of the gross benefit, relative to the resources expended, and (iv) a component percentage, which is the ratio of a component of an item to the item. Wise leaders would never look at absolute numbers as indicative of performance, good or bad; ratios are vital ways to assess performance in relevant perspectives.

Specifically with reference to a company’s operating and financial performance, there are six types of ratios which constitute an essential analytical framework. These are (1) liquidity ratios, which provide information on a company’s ability to meet its short term or immediate obligations, (2) profitability ratios, which provide information on the amount of income from each rupee of sales, (3) activity ratios, which provide information on a company’s ability to manage its resources or assets efficiently, (4) leverage ratios, which provide information on the ability of a company to satisfy the fixed financing obligations, (5) investor ratios, which describe a company’s ability to satisfy shareholders investing in stock of the company, and (6) return on investment ratios, which provide information on the profits, relative to the assets deployed to produce the profits.

Universality

There is probably no analytical tool in business that is as universal as ratio analysis. Contrary to popular fixation that it is a finance oriented tool, it can be used to describe the state of affairs in respect of any type of functional performance (for example, number of exiting employees to total number of employees in an organization) or any type of physical performance (for example, units exported to total units sold). There can also be crossover ratios covering physical and financial numbers (for example, value added in rupees per employee). There are probably no absolute prescriptive levels for ratios, they being influenced by the age and market standing of the company, nature of industry, quality of management, nature of investors and the state of economy. They are, however, extremely useful as comparisons with other firms in same, similar or differentiated industries and as trends over time. Interestingly, ratio analysis can be applied to an individual’s operating and financial performance as well, equally effectively.

As an example of applicability to an individual, liquidity ratios are very insightful. Given the relatively non-liquid or volatile nature of investments that individuals tend to make, measures like quick ratios (current assets less money tied up in equities and bonds to current liabilities) are more helpful and cautionary. Similarly, those steeped in equity and investment culture must deploy profitability ratios consistently across their sectors of investment to judge their relative performance. They can utilize leverage ratios to assess their short term and long term financial viability. They can also follow a physical framework in terms of hours spent on social networking to hours spent on studies etc. The purpose of the blog post is, however, different; it seeks to adapt and apply the insightful framework of ratio analysis to analyse, judge and improve one’s emotional well-being.

Emotionalism

While emotions are a perfectly normal part of human life (even all life, considering how birds and animals are also emotive), emotionalism is an overwhelming and controlling state of mind and heart. Emotionalism may be defined as a strong or excessive appeal to emotions, either all by oneself or by one to another. It would include unwarranted expression or display of emotions in day to day settings. Emotions themselves are several but one can consider nine emotions (Nava Rasas as per Hindu fine art tradition) as core or root emotions. With certain liberty for the purposes of this post, these are tweaked and expanded as synonyms-like feelings as follows: love (also, affection or collaboration), happiness (also, optimism or energy), compassion (also, caring or pity), anger (excitement or revulsion), fear (also, anxiety or disquiet), disgust (also, revulsion or irritation), courage (also, adventurism or risk taking), wonder (also, surprise or fulfilment), serenity (also, equanimity and sobriety).

Positive leaders like Mahatma Gandhi and Nelson Mandela exemplified positive emotions such as love, happiness, compassion, courage, surprise and serenity while negative leaders like dictators feed on negative emotions like anger, fear, disgust and courage (of a different kind, though). The occurrence of emotions is not only related to personality types but the circumstances faced by the personalities. An emotionally driven person is not only overwhelmed by the above core emotions in varying degrees but also tries to dominate others through his dominant emotions. The way to avoid emotionalism is by seeking an emotional balance. This, of course, varies widely between individuals. That said, certain emotional ratios are relevant to understand one’s own emotional health better and work towards a healthy emotional balance. Six emotional ratios are presented below.

Emotional liquidity

Happiness is the most fulfilling emotion. Some people are spontaneously happy while some are happy only upon accomplishing their goals. A basal naturally spontaneous happiness level, superimposed by a variable happiness level related to goal accomplishment, is the best state. Alongside the asset of happiness, the liability of unhappiness or sadness also exists. Happiness tends to be short-lived while sadness tends to be long lasting. For example, a person who loses out on an exciting promotion is likely to be saddened (with respect to the specific promotion goal) till the next annual performance review cycle while he could still make continuous achievements, and hence derive continuous happiness, all though the year. An emotionally liquid individual has assets of happiness, optimism and energy that are several times over the sad liability of unfulfilled goals. An emotionally liquid person is one who is an energetic and optimistic seeker of happiness.

Emotional viability

Life is difficult and challenging, especially if one sets for himself or herself higher order goals that are not easily achievable. Usually, aspiration or goal motivates one to attempt achievement. Yet, one is beset by fear of failure or anxiety of slippage vis-à-vis the goals. The counteracting force for this fear is courage, peppered by a bit of adventurism and risk taking. The ratio of one’s courage to one’s fear has to be a significant number for one to be emotionally viable. Additionally, another ratio reinforces one’s emotional viability; it is the ratio of one’s affectionate emotions to one’s revulsion hot points. An ability to naturally be loving, affectionate and collaborative overcomes the tendency to be repelled by negatively surprising or irritatingly disgusting developments that one encounters. The former, if endowed in a person in a rich measure, helps him or her to achieve and sustain emotional viability. 

Emotional turnover

Everyday activities bring their own joys and disappointments even as most daily chores tend to be emotion-neutral. That said, just as one saves money for anticipated and unanticipated expenses, one must accumulate an inventory of happiness that can compensate for sharp spikes in unhappiness. Happiness needs to be viewed not as a momentary pleasure but an accumulation of good moments and memories that keeps one’s ship of life well protected when buffeted by sudden storms. Ideally, at any point of time one should be in a position to have happiness that outlasts disappointments of two quarters. It is more particularly true for corporate executives who battle the assessment rigour of corporate quarterly performance by the Street every quarter and also for the layman who is perplexed by loss of market capitalization or spike in inflation every quarter!   

Emotional leverage

Amongst all financial leverage ratios, debt-equity ratio is the most meaningful and popular indicator of financial health and stability of a firm. Investors and financial institutions provide capital to companies to develop as equity and debt respectively. The higher the proportion of debt the higher the leverage. Individuals have their own emotional debt-equity ratio as well. The broader society encourages individual development through two instruments - trust and goodwill. Trust is situational and contextual and, much like debt, needs periodic servicing, Defaults could lead to poor rating of individuals. In contrast, an individual in his or her lifetime can gain goodwill through successive positive actions. Much like equity or risk capital, goodwill remains undented despite occasional minor issues. Like debt-equity ratio being ideal at 1:1 for optimal leverage, an equal proportion of trust and goodwill bestows serenity on an individual.

Emotional return

Businesses cannot be expected to provide usurious returns continuously; eventually firms converge towards an industry average rate of return. The businesses are measured by earnings per share (EPS) and by return on total investment (ROI). In a loose sense, earnings are nothing but revenues less expenditure. The nine emotions comprise the positive emotions (PEs) of love, happiness, compassion and serenity, and non-positive or negative emotions of surprise, anger and disgust (NEs). The difference of PEs over NEs represents the net positive emotion (NPE) of an individual. This is modified with multiplication by the emotional viability index (EVI) of courage divided by fear (C/F). An EVI which is a natural number greater than 1 enhances the NPE of an individual. The net emotional return for an individual thus is a clear arithmetic of differently classified emotions as discussed herein.

Reservoir and dam

We have seen that emotions are complex feelings and spontaneous expressions at play but also have an intriguing and inspiring arithmetic. Emotional ratio analysis as outlined in this blog post is a tool for every individual to understand his or her own emotional profile and to achieve favourable emotional ratios. For that to happen, we need to understand two other characteristics of emotions as follows.

The first is that contrary to a common misunderstanding, emotions are not transient or fleeting feelings and expressions that are triggered by isolated events. Emotions tend to accumulate and are triggered into flow by individual triggers. Emotional reservoirs are a fact of life for every individual, however much one may deny. It is this characteristic that would enable one draw up emotional statements for a period and also as at the end of a period, much like income statement and balance sheet, respectively. While this being subjective, the analogy helps one semi-quantify one’s emotional income and expenditure as well as emotional assets and liabilities.

The second is that while all emotions are like rivers flowing into, and as, reservoirs of different capacities depending on one’s emotional propensities, there is one emotion - serenity - that would act as a dam to all the other eight emotions. With age, experience, maturity and wisdom, one is able to build higher heights of serenity that can check the inevitable build-up of emotional reservoirs that happens over time. Serenity discriminates in terms of moderating any overflow of emotions. Serenity is the master emotion that one needs to develop to be able to achieve an enhanced NPE. Serenity is also the quintessential ultimate emotion that arises from a healthy fusion of one’s body, mind, heart and soul.    

Posted by Dr CB Rao on April 25, 2015 

The Seeds that Become Trees: A New Logic for India’s Industrial Forestry

There are many sayings that demonstrate the power of small seeds that could grow into massive trees. After all, nature is all about free fall of seeds in fertile lands turning into bountiful forests, duly aided by rain and shine. In a nation’s life too, industrial and economic growth tends to be based on seeds of innovation and manufacture. A few ideological moves (eg., heavy engineering thrust) or a few individual initiatives (eg., Sanjay Gandhi’s small car passion) could turn out to be major transformational revolutions years later. The drivers of development are simple and straightforward in many cases; however, only perceptive administrations at least register them while the perceptive and proactive administrations lead such transformations. Very few economies of the world are blessed with these twin capabilities; the vast majority of others need not despair, however. Not being in the forefront of revolutionary changes in the past does not mean that the country cannot be a leader in future, provided that the nation has learnt from the past as to how to visualize and develop the future!

India, despite its hoary history, had to take the bow of modern industrialization only from the time of its independence in August 1947. Indian administration’s cognitive skills, including those related to conceptualization and analysis of industrial development, have started evolving in the 1950s and started laying the developmental pathways for industrial development from the 1960s. All through the period, there have been opportunities to witness and interpret as well as absorb and implement how other nations pursued their growth. India followed a mixed economy model, and achieved mixed results until a crisis of sorts stared at the economy in the 1990s. This period of liberalization was a period of enlightenment for economic and industrial planning. That said, it cannot be denied that some of the important foundations were laid prior to liberalization while far more could have been done after liberalization. Whether a nation merely views such transformational movements as products of time or leads such transformations proactively is a resultant of many factors. This blog post reviews five ‘seed to tree’ developments in India to examine if some lessons can be read out of them.

Engineering of the 1960s

For the global industrial economy, the 1960s represented the heydays of modernization and expansion of traditional industries that represented the bulwark of a developed economy. A technologically resurgent Japan brought in new efficiencies to industries such as steel, automobiles and capital goods, and also laid the foundations of a globally networked production-consumption structure, which is based more on competitiveness than on national origin. For India, that period had coincided with the goal of self-reliance for some of the industries in the list such as steel, medium commercial vehicles and capital goods became a preferred choice, albeit with a heavy dependence on imports from countries such as Russia, UK and Germany. Unfortunately, the socialistic dogma of the Pandit Jawaharlal Nehru government served to shut out the development of other important growth engines such as automobiles and white goods.

The 1960s were notable for two concepts of indigenous development – that new cities and economies could be built around new industries, and that more industries meant more economic power to States in India’s federal development paradigm. Cities such as Bhilai, Rourkela, Bokaro, Jamshedpur, Dhanbad and Durgapur stand testimony to the first concept. The now flourishing steel plants in far-flung Southern cities such as Visakhapatnam and Salem stand as living examples of the struggles by the States to get such steel plants. Youngsters were offered only three core engineering educational streams such as mechanical, electrical and civil at that stage, keeping in view such perspectives. But, that was also the time when in other developed countries of USA, Europe and Japan transistor radios  and other electronics devices began to be manufactured in billions. Even as India built a solid traditional engineering infrastructure, the emerging electronics age got ignored by the country.  

   

Electronics of the 1970s

The 1970s were verily the electronics age of computers, audio-video devices, home appliances and a host of electronics systems that provided better accuracy and repeatability to traditional capital goods. The 1970s also saw the emergence of software coding, from the punched card readers to machine languages to FORTRAN and such other languages for man-machine interface. The Indian ministers and bureaucrats probably knew that they were wrong in giving the global electronics revolution a miss in terms of indigenization but did little to correct.  When IIT Madras imported IBM 1401 mainframe computer in 1974 to support development of indigenous technologies, C Subramaniam, the learned Union Minister for Industrial Development remarked that imports of such sophisticated technologies was probably not the best way to develop the indigenous industry. In fact, the governments of that time allowed the free import of second hand or aged equipment to promote industrialization (import of Innocenti scooter plant to set up Scooters India in Lucknow was one example!).  

If China has, over the years, become the great manufacturing workshop of the world and the preferred manufacturing outsourcing destination, the seeds of that industrial amazon were sown in the late1970s, when the concepts of market economy were first embraced in the late 1970s, and the foundations of mass consumer electronics industry began to be laid. While India started to introduce electronics and telecommunications as well as other diversified engineering courses, the country saw the flight of technical talent to USA and Europe which offered the new-age electro-mechanical and mechatronic industrial development. Continuing the inward looking traditional industrial policies, the socialistic ideologues and governments of the 1970s began to add computers, consumer electronics and home appliances to the list of “luxury goods” that only automobiles represented till then! Full four decades later, even in 2015, the country is still not sure of being an electronics-driven industrial powerhouse like China has been from the 1980s. 

  

Automobiles of the 1980s

Amidst the lag of India’s industrial and economic competitiveness, something that was absolutely maverick happened in the 1980s – the establishment of Maruti Suzuki India Limited in 1981 by the Government of India in 50:50 joint venture partnership with Suzuki Motor Corporation of Japan! Maruti Suzuki verily ushered in an automobile revolution in India with an unprecedented influx of new passenger car models and light commercial vehicles, mostly with Japanese technologies and their subsequent indigenization. This has led to the creation of four Detroits in India, one in the traditionally automobile oriented Chennai region, the second in the Northern Gurgaon region where Maruti Suzuki established itself, the third in the Western Pune region and now in the North-Western Sanand region. There were, of course, large two-wheeler facilities in Pune, Aurangabad and certain other parts of the country but the role of the automobile industry of the 1980s in starting a new manufacturing revolution in India cannot be minimized.

With a production level close to 22 million vehicles per year, India is one of the largest producers of automobiles in the world. In terms of two-wheelers, India is globally the largest with an output of 17 million vehicles. India is also the only large and structured player globally in the unique and ubiquitous three wheeler segment with an output of one million vehicles per annum. In cars (and utility vehicles) also, India is no longer a trailing country. From a meagre production of 30,000 till the late 1970s, India now clocks an output of 3.2 million! Commercial vehicles are also highly diversified and expanded with an annual output of one million. Performance on the export front has, however, been less than desirable. The only notable bright spot on the automotive export front has been the export of two million two wheelers, constituting about 12 percent of the total two wheeler output while all others have had insignificant (low single digit percentage) export levels.

Software of the 1990s

Even as automobiles began representing the new hardware of Indian industry from the 1980s, software emerged as the first driver of India’s global competitiveness. The 1980s saw maturing of Tata Consultancy Services from punching to coding, and the founding of India’s future software industry bellwether, Infosys. This phase represented the start of another type of migration of talent within India, from manufacturing to software! With the foundations laid in the 1980s, in the 1990s, software came to be associated with a larger canvas of information technology (IT), emphatically transforming the way the world looked at India and IT. The sector also established that India’s global delivery model could provide leadership not merely in terms of talent cost advantage but more in terms of seamless turnaround of systems development and transactions. IT has also laid the foundations of a new youthful middle class society that began embracing consumer economy and driving products and services typical of such economy.   

India’s IT sector has been notable for a massive investment in in-house training and development, in terms of more up to date coding skills and multi-country linguistic and cultural approaches. The industry has perfected a model of twin recruitment and development engines driving scale and globalization.  After its global success, the IT industry has been trying to move up the value system by offering consultancy services and also through vertical specializations. These are, however, logical steps and do not constitute any strategic redefinition. A major failing of the Indian IT sector has been in terms of its disinclination towards strong inorganic growth and diffidence towards developing its own product platforms. It has taken a Sikka to try to add a strong product direction to Infosys. Not many IT majors, however, seem inclined to commit resources for product investments. The future of the IT industry is as strong as ever but probably below the potential.  

Internet of the 2000s

The Internet has done wonders for globalization and communication. The Internet of People connects people and organizations across the globe through a host of devices such as computers, tablets and smart phones, connected by a telecommunications backbone. Many things that are done physically, from retailing to movie screening, began to be conducted by remote management through the Internet, in an increasing measure. After digital book publishing and reading, electronic commerce and mobile wallets have become the new platforms. This has resulted in a huge shift in how business is conducted in various fields, and the future potential. IRCTC, the eTicketing platform of Indian Railways logs between 0.5 to 1.0 million tickets per day which is still a fraction of 22 million passengers moving on any day over the Indian railway network. There could be an explosion of the Internet of People in India with better and universal broadband and wifi connectivity, lowering of tariffs for data transmission and availability of additional spectrum.

It is now getting evident that the next revolution in the Internet could be more profound. The Internet of Things could connect devices and environments in multiple ways, revolutionizing how people live on a day to day basis. Healthcare, travel, home life, retailing are all set to become more real time and inclusive. RFIDs, sensors, scanners, software, analytics, processors and telecommunications would determine if product and industrial structures would undergo a metamorphosis. Unfortunately, the greater the input of technological change the greater is also the level of waste. For example, as opposed to replacing normal electric bulbs or refrigerators after their useful life, technologically connected appliances may seek replacement every year as new technology arrives. The e-waste generated by smart phones and tablets is indicative of the waste that could occur across all product categories in the Internet of Things.

Indigenous seeds

The choice of just five sectors as above to describe India’s industrial development of the last decade is by no means comprehensive (for example, pharmaceuticals was not covered!) but is certainly illustrative. The seeds of India’s industrial development have been from trees that have grown elsewhere. Even in respect of IT where India has become a global leader, not a single computer language or operating system has been developed in India (may have been developed elsewhere partially with Indian talent, however). The transhipped seeds, and in some cases the transplanted trees themselves, grew in the eager markets of India. Over the last several decades, there have been gallant efforts to indigenize design and manufacture; yet even the new NDA government’s current manufacturing paradigm of ‘Make in India’ seems to require overseas seeds. The past experience suggests that financial investments, technologies, equipment and components come in bundles each with a cycle of cautious investment, domestic consumption, limited exports and capital repatriation with a very specific time span in mind. Every time industrial renewal is desired, the cycle of imported seeds et al repeats itself.

With the Modi government firmly committed to a policy of India’s economic growth equating with India’s self-respect, a different seeding programme for industrial and economic growth is required. India now has the option of staging the next manufacturing revolution following the previous model or improving upon it to make it a self-perpetuating cycle of indigenous development. For this to happen, a new genre of seeds is required. The past industrial revolutions were hamstrung by limited scientific and technological educational streams which came into existence only after the development of physical industrial infrastructure. This has resulted in talent bottlenecks and skill gaps. A bolder India must create educational disciplines far in advance of the sighting of new industrial infrastructure. If necessary, to cut the developmental times short, the vast Indian diaspora which is enthralled by the prospect of a new India must be encouraged to come on two to three year sabbatical to seed their talents in Indian industry, research laboratories and educational institutions. More importantly, ‘Make in India’ paradigm must be supplemented by ‘Research in India’ and ‘Design in India’ paradigms. And, as the costly lesson of missing the electronics revolution shows, no sunrise sector should be ignored by India in this phase.

Posted by Dr CB Rao on April 14, 2015           

The Absolute Power of Relative Silence: A Simple Sensory Model of Connected Leadership

Leadership has attracted, and continues to attract, huge interest. Every time a leader speaks or acts, there are possibilities of a new “leadership” “thought” or “claim” emerging. When Bill Gates, the founder of Microsoft, addressed a letter to Microsoft a couple of days ago on the occasion of the fortieth anniversary of Microsoft (Bill Gates and Paul Allen founded Microsoft on April 4, 1975), there were expectations of new leadership hints, bridging his past and current roles at Microsoft and the current and future roles at Bill and Melinda Gates Foundation, his current philanthropic preoccupation. Bill Gates, however, only made a succinct review of how he and Paul Allen started Microsoft with the initial bold goal of a computer on every desk and in every home and the role played by Microsoft in the revolutionary transformation of the computing scene over the last four decades (with its operating system). He also said that what matters most now is what Microsoft does next in terms of making the power of technology accessible to everyone, and every device.

There are instances like Microsoft (and Apple, Sony, Toyota, Ford, Infosys and several other corporations) where the growth of an idea from a small start-up to a large institution reflects leadership by and of its own. Importantly, in all such cases, the founders remain at the helm, at least till the firms reach their respective critical scale and scope. Thereafter, it is left to their scions or professionals to continue to steer the corporation in the manners they deem fit. In such cases, the styles tend to be differently effective despite varying leadership attributes but also take one of the three approaches: (i) be somewhat non-adaptive to the emerging environmental changes (as was the case with Steve Ballmer who succeeded Bill Gates), (ii) be proactively adaptive to craft a role in the changing environment (as seems to be the case with Satya Nadella who succeeded Steve Ballmer), or (iii) be creatively different in building on the legacy of the great founders (as seems to be the case with Tim Cook who succeed Steve Jobs, after his untimely demise).

Impatient, inaccurate

Clearly, growth of great institutions offers great leadership lessons. Academic leadership gurus, however, have their own leadership theories which are force-fitted on to existing visible institutional leadership successes. Such theories and models talk of leadership styles (participative, facilitative, authoritarian, transactional, transformative etc.,) and leadership competencies (visionary, strategic, interpersonal, communication, decision making, risk taking etc.,). There is no evidence of leaders during their active and transformational phases of their leadership roles taking time to sit with academic researchers to define their specific institutional leadership styles. While leaders like Jack Welsh may have been very articulate about their leadership styles while in harness, the motivations for that seem to be developing in terms of developing personalized leadership and mentoring businesses thereafter. Biographical studies also seem to be off mark in distilling and describing the true leadership styles.

Biographical renderings can provide valuable insights provided they are thoroughly researched by the biographer, deeply collaborated by the leader and his peers, and evidentially corroborated by events and developments. If not, they can be misleading and in the case of multiple biographies of the same leader even controversial and contradictory in parts. For example, the authorized version, titled ‘Steve Jobs’ by Walter Isaacson which was published in 2011, after Jobs’ demise is criticized by Apple executives as not being representative of Steve while the more recent follow-on unauthorized version, titled ‘Becoming Steve Jobs’ by Brent Schlender and Rick Tetzeli published in 2015 won praise of Apple executives for being authentic. Amidst the impatience and inaccuracy, the opportunity for capturing helpful leadership insights and developing a leadership model based on proven institutional track record remains unfulfilled. Part of the reason could be because the deep leadership knowledge of a successful leader could be a source of competitive advantage of the firm, which cannot be disclosed prematurely. It could also be that true leaders recognize the collective institutional nature of leadership, and refrain from individualizing it to themselves.

Connected leadership

Leadership is all about staying connected - with all the stakeholders (employees, investors, vendors, governments, public included) and in multiple ways (physical, virtual, direct, diplomatic, objective, emotional, and so on). Being connected is an essential component of communication, collaboration, coaching and influencing. Different leaders have different ways of getting connected - from reaching out to getting reached out to. The different competencies that leaders possess enable them connect to their constituencies in different ways of such a connection spectrum. I have in an earlier blogpost titled “Five Great Indian Leaders: One Singular Leadership Ethic”, Strategy Musings, January 23, 2011 discussed how multifarious leadership competencies are fused under the quintessential Indian leadership model of intellect-driven work ethic (http://cbrao2008.blogspot.in/2011/01/five-great-indian-leaders-one-singular.html). Reviewing the blogpost again after a gap of four years and also studying further works on Indian and global leaders, I am of the view that staying connected is an important aspect of high calibre leadership.

Competencies play a major part in staying connected. Those leaders with high competencies, of which ability to stay humble is one, tend to reach out and be reached out to. In her convocation address at IIM Calcutta, Indra Nooyi, Chairperson of global food and beverage giant Pepsico attributed her being in the CEO position to being in a state of perpetual learning and to staying connected to her parental roots. She also advocated giving back to society even as one learns and earns. Giving back to stakeholders takes different forms depending on how close or distant they are to the leaders. Among all stakeholders, employees are the most important ones for leaders to connect with.  While there are different ways of connecting, including through platforms offered by communications specialists, the leadership connection especially to or with employees, occurs through day to day leadership interactions. While social and emotional connect is increasingly recognized as being as important as technical or professional connection, this blog post proposes a sensory connection platform to serve as a distinctive leadership model.

Sensory leadership model

For accomplished leaders, interpersonal connection in organizations, of which leadership connection is an important one, takes place through the six sensory functions of a human being, in a somewhat metaphorical sense. These are the six powers of sight, speech, hearing, smell, taste and touch by which a living being exchanges information with the world around. While these may not be applicable to life as a leader in an identical manner, they play a notable role with subtle variations of interpretation. The six point sensory postulates for a connected leadership model may be defined as below.

Look around but observe sharp

An ability to see is the most important human faculty even though the other sensory functions are also very important. For successful leaders, the ability to see is accompanied by a keenness to observe. Observation brings care and watchfulness to the rather normal ability to see. From the ability to read body language of others in meetings and interactions to the wisdom to sight a risk or an opportunity in the world, the power of observation can help make a leader truly perceptive. This is one of the founding planks of a leader’s ability to envision a new future state as well as improve the current state.  

Talk less but mean more 

Great leaders are effective communicators. Effective communication is not a function of the oratory level or time as is commonly understood; rather it is one that is thematic, purposeful and meaningful to the audience, and the task at hand. Effective communicators, over time, develop the ability to convey a message beyond what words may purport to. At one level, this is a function of the cumulative connect a leader has with the team; at another level it is also a function of the mastery over subject, the sincerity of purpose and the empathy with the audience that a leader demonstrates, almost as his or her second nature.

Hear well but listen intense

Everyone may have the ability to hear but only a few would have the habit of really listening. Hearing is the process of receiving sound through the ear. It could, at its worst, be just a mechanical process of interpreting vibrations of eardrum into sounds and words. Listening, on the other hand, is the process of hearing with care and a preparedness to register the message, and act on it after due processing. Listening is an interpersonal skill required for good communication and collaboration. At leadership level, where knowledge and experience as well as position and power result in a certain level of presumptuousness on the part of leaders, listening skills could make all the difference between an empathetic and responsive leader and an indifferent and desultory leader.   

Smell a whiff, ahead of the fragrance

Developments in the organization or in the environment are never definitive while in the making. Perceptive leaders are able to detect the early signs as they waft through. These could be as simple as internal employees gradually failing to greet each other in an organization or external agencies taking longer to appraise a project put forth by the organization. Successful leaders are adept at understanding the socio-economic changes before they become trends and then turn on into movements. This requires that leaders have good social sensitivity, emotional intelligence and economic aptitude, regardless of their functional specializations. Leaders in emerging technologies and businesses as also in cyclical businesses must have this early recognition faculty.

Taste the sample to savour the universe

An organizational ecosystem or an environmental envelope is a huge canvas which can never be tracked or understood in its entirety. The head of a conglomerate, or even a large specialized business, would not be able to evaluate the effectiveness of strategies until they are fully implemented; waiting until then would be too late. An ability to define meaningful pilot projects or undertake sampling dipsticks to assess likely total strategic effectiveness is an essential component of successful strategic implementations. Regional product launches, segmented change projects, specific leadership evaluations, and laboratory/field simulations are some of the methods to assess whether planned universal strategies would be actually successful.

Lead the mind but touch the heart

Organizations need logical and rational thoughts and actions to be effective. Leaders must develop plans and execute actions that stand the test of logic and rationality. In short, leaders must lead through mind. Yet, there are matters of organization where appeal to heart is equally essential. In aspects of business turnaround which call for sacrifices for better times, in matters of leadership transformations which disturb stable networks and in phases of start-up with natural uncertainty leaders need to appeal to the heart for teams to stay together and scale all difficulties. Teams in mountaineering and other expeditions overcome most challenging conditions through emotional bonding as much as through professional skill.

Relative silence, absolute power

Bill Gates has been relatively silent for over 7 years since he gave up formal executive leadership of Microsoft in 2008. Steve Ballmer, who succeeded him as the executive head, is known for his thumping leadership style. Satya Nadella, on the contrary, was not known to be anything other than a quiet protagonist of the cloud platform. Yet, a quiet Satya Nadella could seamlessly take over from a dramatic Steve Ballmer, and also steer a significant directional change. Bill Gates’ simple letter continues to have its solid impact. While leadership cannot be totally silent and uncommunicative, in most cases, rather than self-proclamations three aspects communicate leadership – firstly, results speak for themselves; secondly, institutions stand as expressive legacies; and thirdly, processes provide communicative continuums. Successful leaders, and even powerful leaders, tend to be relatively silent, rather than banal, about their leadership.

While relative silence, as an intriguing but appropriate leadership trait, has powerful value, the mystery of what real and practical leadership is all about needs to be decoded. This can happen only when leaders, at the peaks of their success as well as at the nadirs of their failure speak up openly, in dialogue with management experts, academic researchers and objective biographers, on the drivers of success and failure. Those who are reluctant to open up for reasons of either humility or competitive risk should keep making leadership notes on a periodic basis which can be opened up at appropriate times. Only then the disproportionate cacophony generated by limited leadership theories can be replaced by more meaningful, realistic and authentic leadership models. This blog post has discussed a model of connected sensory leadership where power flows from silence and simplicity, relatively speaking! More such theories can emerge from open and shared leadership notes.

Posted by Dr CB Rao on March 11, 2015   

The Bitter-Sweet Truth of ‘Positional Monopoly’: Ten Management Lessons from the Curious but Educative Case of SKS Airport Sweet Stall

Positional monopoly occurs when a retailer is exclusively present in a geographically defined marketplace. The classic case is that of Higginbothams, the famous heritage book store that has its book stalls in several railway stations of India. While books can be purchased anywhere and anytime, the exclusive positioning of the bookstalls without any competition and the impulse buying by passengers to spend time in long journeys create positional monopoly for such bookstalls. Food catering by the sole catering agent of the Indian Railways, IRCTC, in railway trains is another example. The same can be said of sole selling shops that are situated in isolated areas, say a ‘kirana’ shop in the Himalayas!

Positional monopoly occurs at a product level too. Certain retailers may choose to stock only one brand of a particular class of products forcing customers to buy that product as part of a larger bundle of products from that retailer. Similarly, certain manufacturers may choose to retail their products only through certain channels (including only e-platforms). Positional monopoly makes customers forsake their brand loyalty in favour of purchasing convenience or inevitability. Positional monopoly gets reinforced when the demand for a product is a natural and integral part of living/social culture and the demand can migrate from one brand to another easily. Positional monopoly does not, however, mean that there would be unbounded demand. This blog post attempts a study of positional monopoly through the case optics of a famous sweet shop of Chennai, and develop some key management insights.

Sweet tooth

Most Indians have a sweet tooth. They also have a fascination for ‘branded sweets’ and ‘signature sweets’. In Chennai, famous sweet houses such as Aggarwal, The Grand Sweets & Snacks (GSS), Sri Krishna Sweets (SKS), Archana Sweets and Adyar Ananda Bhavan (AAB) are some of the branded sweet houses, with an amazing array of mouth-watering sweets. All these houses have their signature sweets, Aggarwal’s Jangri, Grand’s Fruit Halwa, SKS’ Mysorepa,  Archana’s Badam Halwa and AAB’s Sonepapdi are some such signature sweets. Of course, in each case, the formidable range of sweets is accompanied by an equally tasty set of snacks. In this respect, GSS probably is the best known brand. Like geographic indicators, the sweet houses have their locational niches in important shopping districts, with distinctive taste profiles.

While the sweet houses have their proprietary and distinctive tastes and flavours, they have no monopolistic power. They have their loyal customers but they are substitutable too. If one were to imagine a situation where only one of these sweet houses were to be present, it stands to reason that all the demand of the four brands would flow to the monopoly brand. That is the sweet pulling power of the four distinctive sweet houses! In recent years, SKS embarked on a store positioning drive that positioned SKS retail shops in traffic flow spots such as airports and fuel delivery stations. Of these, SKS sweet stalls in the Chennai airport are unique and distinctive, and strategically positioned with high visibility. The ideal situation of ‘positional monopoly’ has thus been secured by SKS. It thus offers an interesting case study to understand the nuances of positional monopoly.

Tested taste

SKS sweet stalls are situated, one each, in the arrival and departure halls of the Chennai domestic terminal (Kamaraj Terminal). They are small, compact stalls offering the full portfolio of sweets and snacks, in ready to carry boxes as well as in open trays for on-the-spot assorted selection and customized packing. SKS has also made special efforts to cater to the perceived unique needs of air travellers by offering special multi-product packs and ready to eat foods as well. Some of these custom packs are not available in downtown city stalls, presumably. All the products in the airport stalls are served in a hygienic manner by courteous staff. The stall also provides flexibility to have packs of just one or two sweets. Customers are even provided with a generous opportunity to test the taste of different products, a unique customer-friendly feature of SKS in all its locations!

Given the sweet tooth that passengers have, the special role sweets play as gifts by travelling public, the service atmosphere created, and the general demand portability for sweets across brands, the positional monopoly should have secured a demand of several thousands of packs to the SKS airport stalls. That is because the domestic terminal handles 9 million passengers approximately in a year, which works out to approximately 25,000 passengers per day. In marketing and sales management, brand recall and footfalls are considered essential to generate sales. SKS stalls which capture 100 percent eye falls and are grazed by thousands of walk pasts are ideally positioned for maximal footfalls and hence for maximal business, reaching up to as many passengers as handled by the airport, at least in a theoretical sense. 

Bitter-sweet position

In contrast to the above positive indicators of positional monopoly, however, not more than a couple of hundred packets are possibly sold in each of the SKS stalls in the airport on a daily basis. The high brand visibility and the excellent product range of SKS in a uniquely exclusive airport positioning is contrasted, unfortunately and surprisingly, by weak sales. Applying some general management and industrial engineering principles, certain factors can be identified for the bitter-sweet result. Firstly, strategic positioning for effective sales is more important than visible positioning for branding. The stall in the departure hall is located near the gates before the check-in counters and before the security area. Fundamentally, the departing (boarding) passengers would be in a preoccupation to take boarding passes and in a hurry to undergo security check rather than purchase sweets in a languid manner. Clearly, if the sweet stall in the departure hall is located in the pre-boarding waiting lounge there would be a greater possibility of relaxed purchase. 

Similar positioning issue affects the sweet stall in the arrival lounge too. The arrival sweet stall is located near the exit gates after the taxi booking counters. Here again, fundamentally the arriving (homebound) passengers would be in a preoccupation to get into their cabs once the cab booking is done rather than purchase sweets delaying the homecoming further. Clearly, if the sweet stall in the arrival hall is located in the baggage claim area, there would be a greater possibility of purchase while the passengers wait for their baggage. To aggravate the issue for the arrival lounge stall, the choice of sweets is decidedly inferior to what exists in the departure stall.  The arrival stall, on the contrary, should have a much better USP than either the pre-boarding departure stall or even the city stalls (as the homebound passenger could always think of the city alternative). The lesson here is that positional monopoly by itself does not confer any significant advantage unless it is strategically secured and creatively deployed to be effective.   

ML-PL-CL-AL business model

Every business (in fact, every human endeavour) would have a maximum level (driven largely by the total customer universe), a potential level (driven largely by customer demand preferences), a constrained level (in fact, most times self-constrained by infrastructure and organization!), and an achievable level (which may work best when it is also aspirational). The case of SKS sweet stall illustrates the point tellingly. Given that 25,000 passengers pass through the Chennai domestic airport daily, the potential for SKS is to sell as many as 25,000 packs at least. However, demand preferences and perceptions on time trade-offs as discussed above set a potential business level which can be quantified only by consistent consumer research. This can lead to a figure higher or lower than the magical 25,000 mark. Let us assume in this case that it would lead to a potentially lower level of 12, 500 (50 percent of the maximum). Here comes the catch; most businesses and organizations are not set up to capture even the potential business; they are self-constrained by their own infrastructural, operational and organizational templates!  

Take the case of the airport sweet stall. Combining both the departure and arrival stalls, it has four dispensing and billing customer sale points. The stall itself can accommodate only two queue lines, keep in mind also that every customer would have luggage with him or her, making the queue lines complex and making it difficult for more people to join. Each selection by the customer from the look to delivery through all the steps of iterative choice, communication, packing, billing and payment takes on an average five minutes. As a result, every five minutes four packs can be delivered (because we have four customer points in the aggregate). Assuming that the stalls are run round the clock 24 hours (which is not a reality, and also is not relevant as domestic flights do not operate round the clock), we have 288 slots of five minutes each. Given the delivery rate of four packs every five minutes, the feasible number of packs that can be delivered on any day is only 1152, which is 9.2 percent of the potential daily business and just 4.6 percent of the maximal daily business.

Various other logistical and behavioural issues would determine if even the constrained business of 1152 packs can, in fact, be achieved. This could relate to queue lines not accommodating more than a handful of passengers, mismatch between flight times and wait times, bunching of flight and people arrivals and departures, mismatch between customer wants and sweet availability, and the need for sales personnel to have rest times and breaks. The achievable business would be clearly lower than 1152 packs, and it is not, therefore, surprising that the sweet stall manages to sell no more than half of even the self-constrained demand. Clearly, there could be limitations (imposed by the airport authorities or the leasing charges) in terms of owning a larger space that accommodates additional display space, more queue lines and more billing points. But, the ML-PL-CL-AL Business Model illustrates how the typical businesses are planned to inherently operate hugely below their maximum potential and what can be done to bridge such huge gaps.

Ten management lessons

The objective of the blogpost (and the embedded case study) is not to discuss SKS Sweets per se, a respected and efficient entrepreneurial institution in its industry, which is run on professional lines but is to develop certain insights as to how businesses are unknowingly planned, established and operated not to reach their full potential (and, in some cases, even to fail!). For all we know, SKS airport sweet stalls may have been established just to establish brand visibility and not with business economics in mind. Again, as with all case studies, quantitative or qualitative factors are less important than the concepts and insights such analysis brings out. There are several management lessons that can be gleaned from the case study. Firstly, as illustrated by the study of positional monopoly, monopoly by itself does not guarantee a maximized business. Several strategic and operational positioning initiatives are required to achieve the full potential of even a monopoly.

Secondly, the total market ecosystem should be thoroughly studied to determine the maximum as well as other demand levels. The ML-PL-CL-AL Business Model suggested in this blog post provides a powerful tool for the study. It could be a real eye opener in terms of what can be achieved.

Thirdly, it is important to realize that even apparently well-established or well-run operational models tend to have significant unseen and unknown constraints that severely limit business realization. Industrial engineering and business management principles must be utilized for an introspective analysis and improvement actions. Fourthly, customer connect is a vital factor, whether for physical or virtual businesses. In this case, for example, a simple repositioning of stalls could provide higher customer connect and better business while signature packs, advertised in advance for their features, could minimize the transaction times. Fifthly, there would always be additional lateral solutions even if constraints cannot be avoided in toto. For example, the sweet stall can be a part of an SKS restaurant in the airport. Or, SKS may enter into alliances with select other food points in other strategic locations of the airport to display and sell at least the signature SKS packs. 

Sixthly, ‘silence’ even in respect of known institutions and visible brands is not an acceptable marketing option; active marketing, including market research, is essential for all types of firms and all kinds of brands. Seventhly, in today’s context, a networked business can provide a huge competitive advantage. For example, a departing passenger can be facilitated to log in his product requirement ahead of his travel which is delivered fresh at the airport neatly packaged as desired at the time of departure; or, an arriving passenger in a hurry may be encouraged to leave his request at the arrival sweet stall which is delivered at his home by one of the city branches nearer to the customer home. Eighthly, a business maximization approach needs, more than numbers, the right business and operational insights. As can be seen from this case study, a simple retail outlet can throw up valuable management lessons.  Ninthly, the right business insights would never develop from complex boardroom models; they result from simple ‘gemba’ (real place) observations by open minds. And finally, there can never be a limit to improvement; it is a continuous and perpetual process (‘kaizen’)!

The author feels grateful to Sri Krishna Sweets that their progressive gesture of a presence in the Chennai airport has inspired the author to develop a novel approach to study of monopolies, customer connect and business development, with an integrated and holistic model and present important management lessons.

Posted by Dr CB Rao on April 4, 2015