Judgments

This is that time of the year when Indian business schools welcome their new students. As a self-proclaimed proponent of the case method of learning, I am often invited by my school to teach a session on “case method of learning” to the first year students. And one of my key messages to one such group of students this year was this: “a lot of what you will learn in the business school in terms of content, can be read from a variety of sources; what you will learn in class through continuous, repeated practice is the ability to make sound judgments.” This post is an elaboration of my understanding of the role ‘judgments’ play in business and life.

Judgment: what is it, anyway?

In the legal world, a decision made by a ‘learned Judge’ after hearing out all the arguments from all parties involved. The judge makes up her mind after providing equal and fair opportunity to all concerned parties to present their points of view; a detailed analysis of the evidence presented; collating expert opinions; gleaning through precedents and cognizant of the opportunity of this particular decision setting a precedent; and keeping the law of the land as well as the changing (socio-economic) contexts. When a judge presents a judgement, it provides a guideline for what is good/ bad; preferable/ not-preferable; acceptable/ not-acceptable in that particular context. To that extent, there is a subjective evaluation of the options, given the specific context; and a specific preference for one course of thought/ action over another.

Is it different from decision-making?

At a basic level, a judgement is a decision. But it is more than a just a decision. A decision by definition is a choice. Professor William Starbuck famously distinguished policy making (where resource allocation is a continuous process) from decision-making as ” … the end of deliberation and the beginning of action” (for more details on this quote, and in general, a history of decision-making, read this classic HBR article).

I see the primary difference between decision-making and judgement as managing risk and uncertainty. In his classic book titled “Risk, Uncertainty, and Profit”, Frank Knight (1921) defined uncertainty in a situation where the outomes could not be comprehensively enumerated and the probabilities of their occurances cannot be estimated. On the other hand, risk is a situation where all possible outcomes could be listed and the probabilities may be calculated.

Instructions and advice

One of my favourite assertions in my case learning sessions is the difference between instructions and advice. Instructions as we all know are directions for performing an activity step-by-step, a sort of a standard operating procedure. No thinking involved here – just go ahead and do what is written up/ told to. Whereas advice is contextual. Someone tells you, “it worked for me/ others in a similar context, you may try it yourself”. Of course, this implies that if your context is different, feel free to ignore/ adapt. Isn’t that why advice is always free?!

I bring in an example of how a little boy is taught to cross the street. Imagine his mother’s instructions: “before you cross the street at the zebra crossing, look for the policeman at the intersection; and when he signals you to cross, run across the street as fast as you can!” Wonderful … as long as the context is fixed. What happens if at the intersection, there is no policeman … does the boy keep waiting? What happens if the policeman does not notice him waiting to cross the street? Of what happens when the policeman signals him to cross the street, but a car is speeding towards him? What happens if …. ? Here is where judgements come in handy. Instead of providing him instructions to cross the street, his mother should develop judgement skills in him.

Imagine how you cross the street … if any of you have tried crossing the street in India, you know it better. I distinctly remember when my German colleagues while attending a conference in India, had a harrowing time crossing streets! When you cross the street, you look both sides of the road, spot a car a fair distance away (163m farther), driving relatively slow (at 26 km per hour). You estimate that at your speed of walking (4.5 km per hour), you will be able to cross the 80ft wide street a well 29.5 seconds before the car crosses the point where you intend to cross. You get the point, right? Nobody does all these calculations, we know it. Decision scientists call it intuition, gut, judgements.

It is developed through practice, accumulated through experience, and through active experimentation. Acculturation through socialization and mentoring may help in developing judgements; but no guarantee that just by repeating an action again and again, one would develop judgement. Apart from this practice and experience, a critical component of judgement is intent. Plus, an ability to weigh the pros and cons (in almost real time), as is in decision-making.

Intent in Judgement

One needs to have a specific intent to learn from experience. It is very likely that someone can continue to do an activity repeatedly without developing a sense of judgement. Something like a rote learning or Pavlovian Conditioning. How many times have you experienced people doing the same activities again and again not knowing why they are doing it, and why that way? Inefficient bureaucracies are built on the separation of thinking from doing; the doers are refrained from thinking … they are told to just do, and suspend thinking. Imagine blue-collared workers in the Taylorian world, or even BPO workers, or some customer service executives in modern-day organizations. It requires concerted intent to learn judgement.

Will I lose my job to automation?

The question in most cases is not if, but when? Judgement has never been more important as it is today. Roles where judgements are not required, activities that can be codified into detailed processes (where all possible outcomes can be enumerated and probabilities calculated), automation will take over. Bots and robots dominate the internet world today. Almost every website that has a customer interface has a bot running … and sometimes the responses could be hilarious. For instance, an airline customer thanked an airline sarcastically for misplacing his luggage and the airline responded with a big thanks for his compliment. Obviously, the sarcasm was lost on the automated response. The machine could not “learn” enough. And the entire twitterati took over (read about it here).

We live in a world today where the buzzwords include “big data”, “analytics”, “business intelligence”, and “artificial intelligence”. I recently saw a cartoon on a blog (futurethink.com.sg) that I can relate to very well.

Artificial-Intelligence-and-Real-Intelligence

As machine learning, automation, robotics, and augmented reality dominate our industrial vocabulary, natural intelligence and human judgement should take centrestage in our discourse.

Learning judgement

My advice to budding managers, invest in learning judgement-making. Consciously, with intent. Practise, make mistakes, experiment. Define outcomes and build expertise. After all, what you want to make out of your life and career depends on your judgement, right?

Cheers.

(c) 2017. R Srinivasan.

 

App-in-app?

I recently got an email from my airline app that I could book my car ride within the same app. It was a way of providing end-to-end services. Much like the home pickup and drop service provided for business class customers by the Emirates. What are the implications of these for the customer, the airline, and the cab-hailing firm? Let’s explore.

It is an app-redirect

First, read the terms of how it works in the case of Jet Airways and Uber here. The substantive part of the T&C is hidden in the paragraphs quoted below:

“PLEASE NOTE, YOU ARE MAKING THE PAYMENT TO UBER DIRECTLY. JET AIRWAYS IS NOT RESPONSIBLE / INVOLVED IN THIS FULFILMENT PROCESS. JET AIRWAYS WILL NOT BE LIABLE AND/OR RESPONSIBLE FOR REFUNDS, DELAYS, REJECTIONS, PAYMENT AND FULFILLMENT OR OTHERWISE OF THE SERVICES OR IN RESPECT OF ANY DISPUTES IN RELATION THERETO, IN ANY MANNER WHATSOEVER.” (emphasis original)

Then, what is the value of this app-in-app integration?

Customer perspective

For the customer, it has the potential to work as a seamless end-to-end service. I imagine a future, where you would find a partner using Tinder or TrulyMadly, plan your evening to a game/ movie using BookMyShow, find a restaurant & book your table using Zomato, and take Uber whenever you are ready to move on, or better still, have an Ola Rentals car waiting for you through the evening. All in one app. Wouldn’t you love it, if all of it were integrated in one App? Just imagine the convenience if your restaurant-finder knew that you are in a particular concert at a specific place and you are likely to head out for dinner at a particular time. This specific knowledge could immensely help your restaurant-finder app to customize the experience for you – for instance, it could not only provide you those restaurant options that are open late in the evening after the concert was over, in a location that is close to the venue; it could possibly alert the restaurant that you were arriving in 15 minutes, based on your Uber location. And through the evening, post your pictures on Instagram and SnapChat, check-in to all those locations in Facebook, and Tweet the experience live.

Yes, you would leave a perfect trail for the entire evening in a single place, and if you were to be involved in an investigation, it would be so easy for the officer to trace you! No need for Sherlock Holmes and Watson here – the integrator app would take care of all the snooping for you!

Convenience or scary? What are the safeguards related to such data sharing across different entities? How will the data be regulated?

The Integrator perspective

Why would a Jet Airways provide an Uber link inside its App? Surely cab-hailing and air travel are complementary services. Plus, Jet Airways believes that its customers would find it convenient to book an Uber ride from within the Jet Airways app, as they trust the app to provide Uber with all the relevant details – like the estimated landing/ boarding time of the flight, drop/ pickup addresses, etc. Jet Airways also needs to believe that its customers would rather choose an Uber cab, rather than its competitor OLA Cabs, or any other airport taxi service. The brands should have compatible positioning. Given that Jet Airways is a full service carrier, and differentiates based on its service quality, Uber might be a good fit. But the same might not hold good for a low-cost/ regional carrier like TruJet connecting cities like Tirupati, where Uber does not operate.

Does integrating complementary services affect customer satisfaction, brand loyalty, customer switching costs, and/or multi-homing costs? In contexts where these services and brands are compatible, and there is a convenience involved in sharing of data between these services, there is likely to be some value added. Like airlines and hotels (hotels would like to know your travel schedule); currency exchanges and international travel (the currency exchange would love to know which countries you are visiting); or international mobile services. If there was no data to be shared between the complementary services, the user would rather have them unbundled. Think travel and stock brokerage.

That said, platforms find innovative complementarities. For instance, airlines (primarily the full-service carriers) have launched co-branded credit cards. In a recent visit to Chennai, there were more American Express staff at the Jet Airways lounge than the airline or lounge staff! And they were obviously signing up customers. What are the complementarities between credit cards and air travel, apart from paying from that card? A lot of business travellers have their business travel desks do the payments; consultants have their clients booking the tickets; and even for individuals and entrepreneurs, the credit card market is so fragmented that everyone holds multiple cards. And the payment gateways accept all possible payment options, including “paying cash at the airport counter”. They why co-brand credit cards – sharing of reward points/ airline miles. Either customers do not earn sufficient airline miles and using these co-branded credit cards help them earn more miles and retain/ upgrade their airline status (remember the 2009 movie, Up in the Air?); or they do not earn enough reward points in using their credit cards that they can redeem their airline miles as credit card reward points. Either ways, each one is covering up for the other.

In this covering up, or more diplomatically consolidation of rewards, the partners increase customer switching and multi-homing costs. Surely, redeemable airline miles might be more valuable to a frequent traveller than credit card reward points that have limited redemption/ cash back opportunities. But for loyalty to increase, it is imperative that both brands stand on their own – providing compatible services.

Mother of all apps

All this looks futuristic to you? A lot of you have been using an ubiquitous desktop app known as the browser for a long time, which has been doing exactly this! In a subtle form, though. However, there are firms that own multiple such apps, and they use a single sign-on – like all of Google services. Plus, even third-party sites like Quora allow for using your Google credentials to sign-in. The trade-offs are not always explicitly specified – it is always the case of caveat emptor – consumer beware.

Quora homepage

So, the next time you experience some cross-marketing across platforms/ apps, think what data might be shared across both the apps; and if you would really value the integration.

Cheers!

(c) 2017. R Srinivasan

 

Beware the stupid!

During one of my random browsing through the internet on my mobile device, I came across an interesting set of laws – the basic laws of human stupidity. Yes, you read it right, stupidity. By Carlo M. Cipolla (read the original article here), an Italian-born former professor emeritus of economic history at University of California Berkeley. This is simply genius. This post is to help you find how these laws apply to the start-up ecosystem of today. Read on.

stupid001

The five laws

Let us first understand the five laws. The first law states:

Always and inevitably everyone underestimates the number of stupid individuals in circulation.

They are everywhere and appear suddenly and unexpectedly. Any attempt at quantifying the numbers would be an underestimation.

The second law states:

The probability that a certain person be stupid is independent of any other characteristic of that person.

There is serious diversity at act here. No race, gender, educational attainment, physical characteristics, psychological traits, or even lineage can explain the incidence of stupidity in a person. He says a stupid man is born stupid by providence, and in this regards, nature has outdone herself.

The third law is also labelled a golden law, and presents itself into a neat 2X2 matrix. It states:

A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.

This law classifies people in this world into four categories – the helpless, intelligent, the bandit, and the stupid. Organized on the two axes of gains for self and others, the helpless is fooled by others who gain at his expense; the intelligent creates value for himself as well as others; the bandit gains at the expense of others; whereas the stupid loses himself in the process of destroying others’ value.

Stupid003

While the actions of others are justifiable, it is the actions of the stupid that are so difficult to defend – no one can explain why he behaved that way.

While it is possible that people may behave intelligent one day, bandit another day, and helpless in another place and context; stupid people are remarkably consistent – they are stupid, irrespective. No rationality at all – just pure consistent. And that makes stupidity extremely potent and dangerous. For the simple reason that you cannot erect a rational defence against a stupid attack, as it comes as a surprise, and more importantly, there is no rational cause for the attack in the first place.

Which leads us to the fourth law, which states:

Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.

Even intelligent people and bandits (who are rational) underestimate the probability of occurrence of stupid people, are genuinely surprised by the stupid attacks, and are at a loss to defend themselves effectively against stupidity. Given the inherent unpredictability of stupidity, it is both difficult to understand in the first place, and any attempts at defending against it may itself provide the stupid people with more opportunity to exercise his gifts!

Which leads to the fifth law, which states:

A stupid person is the most dangerous type of person.

And by corollary,

A stupid person is more dangerous than a bandit.

The danger of stupidity cannot be sufficiently understated than this law. Given the irrationality of stupidity, and the costs associated with stupid behaviour, a stupid person is far more dangerous than any other type of person. An intelligent person adds value to society, a helpless fool may transfer value from himself to others, a bandit may transfer value from others to himself; but the stupid erodes value to the society by executing a lose-lose strategy. There could be bandits who might border the stupid (someone who can kill a person for stealing $50 – the value they gain is lower than the value you lose; but the $50 for them is as valuable as life for you). But given the power of stupidity, they can create far more harm than one can even imagine.

Stupid002

The five laws of start-up world stupidity

  1. Stupid business models are aplenty – they rear their head everywhere, every-time. Irrespective of the context, they are omni-present. No exceptions at all. Do you remember business models like Iridium (by Motorola) and the FreePC experiment? It exists even today … Casper Tucker wonders why he should make his own IP redundant (read here).
  2. The probability of a stupid business model arising from a developed country, a venture of a large organisation, from the famed Silicon Valley (or Bangalore, Berlin, or Shanghai for that matter) is the same (and high). The start-up graves are littered with corpses of stupidity-induced deaths of both the firms, their investors, customers, and every other stakeholder you can think of. You think sandpaper for shaving or hair-removal is a bad idea, check this out!
  3. Do I need to tell you the costs of stupidity in the start-up world? I have come across founders who in the first few months of the business taking off, begin talking valuation rather than growth. In the process, they have destroyed value squarely and truly for everyone around them, including themselves. Nothing can match the stupidity of a founder who sacrificed his employment to start-up a firm, acquire customers and force them to make asset-specific investments, make wonderful investor presentations and get a few to invest as angels, PE, or VC; and then instead of worrying about making the business profitable, chase valuation. I surely have mentored a few, and do not want to name them for obvious reasons.
  4. The fourth law is the trick – stupid people thrive by their ability to surprise you by their conviction. And there are enough people who irrationally believe in them; but even the rational actors are unsure how to respond – till it all dawns on them. How many products listed in this article do you remember?
  5. And they are just plain dangerous – they can bring the entire ecosystem down. Remember how the Real Value Vaccummizer brought the entire innovative company down (do you know the firm was the first to introduce a portable fire extinguisher by the brand name Cease Fire, which by the way stays a generic name for portable fire extinguishers)?

So, customers and investors, start-up founders and entrepreneurs, students and researchers, and everyone else, beware the stupid.

Cheers!

© 2017. R. Srinivasan

 

Management theory – just mumbo jumbo?

I am writing here after a really long time. During one of my train journeys between Chennai and Bangalore last weekend, I happened to re-read this article that I had saved for later reading on my mobile device – this appeared on The Economist six months back (read it here). The Economist argues that management as a discipline is similar to the Medieval Catholic church that was transformed by Martin Luther about 500 years ago (business schools = cathedrals; consultants = clergy; the clergy speaking in Latin to give their words an air of authority = management theorists speaking in mumbo-jumbo that only their peers can understand; and having lost touch with the real world).

The Economist avers that all management theory is about four basic ideas – consolidation across industries rather than competitiveness, fewer entrepreneurial success than celebrated in popular discourse; maturing organisational bureaucracies that slow down firms rather than speed; and the seemingly inevitable globalisation being reversed by trends (including ‘Make America Great Again’ and ‘Brexit’). A redemption is therefore called for. Let me re-examine the four trends in the context of Indian business context.

1. Consolidation rather than competition

There is surely a trend of consolidation in Indian industry. The telecom service business is a case in point – the entry of Reliance Jio has led to severe performance pressures and possible consolidation of the service providers (read here); SBI merging its associate banks and other possible PSB mergers (read here); or even the retail industry (read here). Is competition really going down? I think a variety of management theorists would say no. From high velocity environments and hyper-competitive environments in the mid 1990s through mid 2000s, the discourse has evolved to disruptive innovation in the late 2000s, to Industry 4.0, Internet of Things, Artificial Intelligence, and Big Data in the mid 2010s. The fads have changed, but the discourse has always been dominated by some fad or other. We management theorists have and will always seek to sustain our legitimacy by maintaining how difficult it is do business ‘today’ and in the near future. Has there been a time when a management scholar has said that “we live in stable times”?

2. Entrepreneurial failures

Yes, we live in interesting times. There are more and more firms founded, especially in clusters like Bengaluru (erstwhile Bangalore) and Gurugram (erstwhile Gurgaon). But as The Economist argues, there are more and more entrepreneurial failures that the media reports. And these failures come in myriad forms – simple shutdowns like the ones described in these articles (25 failed startups in 2016), or sellouts to larger competitors (see this list of acquisitions by Quikr).

3. Organisational bureaucracies

With so much churn in the ecosystem, we management theorists propound that business is getting faster. Yes, network effects allow for some businesses to scale faster than traditional pipeline businesses. However, given the ubiquity of such businesses  and easy imitation of business models, a lot of startup failures are attributed to these businesses not scaling sufficiently fast enough! Think Uber in China, Snap Deal in India, and other such startups. Scaling is easier said than done.

4. Rise of nationalistic tendencies

This is possibly true of most economies in the world today – rise of nationalism, and the ‘de-flattening’ of the world. Right wing protectionism is on a steady rise, and in some countries, it has reached jingoistic heights.

Time for redemption. What can management theorists do?

It is high time we redeem ourselves and the discipline. Given these trends, here is a callout for management theorists to make their discourse relevant to the business environment of today. We (as management theorists) need to get off the ivory towers and start communicating to the managers of today and tomorrow. While research output as measured by top-tier journal publications is important for an academic career, it is equally important for translating that research into insights relevant for the business managers. The Indian management researcher has very little options to publish high quality research in Indian journals. The quality of Indian management journals targeted at academics leaves much to be desired. Neither are there a variety of high quality Indian practitioner-oriented journals. And the circulation numbers of these journals amongst Indian CEOs? And where are the cases on Indian companies? The number and quality of cases published by Indian academics on Indian firms are too low to be even written about.

dilbertKnowledge

(c) 2017. R Srinivasan.

 

Sri Ramanuja Sahasrabdi (1000th birth anniversary)

This is a post that comes on the day (May 01, 2017) the world celebrates the Millenium of Sri Ramanuja, the Hindu Saint, who lived in India. Please ignore if this does not interest you – I do not intend to propagate Hindu religion or the srivaishnava philosophy. These are my reflections as I attend the festivities at various temples connected with Sri Ramanuja; and this post comes from the outskirts of the Melcote (Thirunarayanapuram) village about 150 Kms from Bangalore.

There are a lot of articles and stories on the Internet on why people consider him a social reformer and his inclusiveness in worship. This post is about how (in my limted understanding) one can see the relevance of his philosophy and teaching in the material world we live today, literally a thousand years apart from the teachings.

 

Mangala slokam (invocatory verse) – learning

Before beginning any work, it is cutomary to pray for the successful completion of the same. The following is the invocation of the Sribashyam (Sri Ramanuja’s commentary on the vedanta sutras of BAdarAyaNa).

अखिल भुवन जन्म स्थेम भन्गादि लीले
विनत विविधभूत व्रत रक्षैक दीक्षे |
श्रुति शिरसि विदीप्ते ब्रह्मणि श्रीनिवासे
भवतु मम परस्मिन् शेमुषी भक्तिरूपा ||

akhila bhuvana janma sthEma bhangAdi leele
vinata vividha bhUta vrAta rakshaika deekshe |
s`ruti s`irasi vidIpte brahmaNi srInivAse
bhavatu mama parasmin s`EmushI bhaktirUpA ||

May my mind be filled with devotional knowledge towards the Supreme Brahman, Lord SrInivAsa, who is exquisitely revealed in the upanishads, who sports in creating, protecting and destroying the entire universe, who has taken the one vow of redeeming the hosts of beings, that devote themselves onto Him (sourced from this post at ramanuja.org).

This is the core of VishishtAdvaita philosophy. Whereas Dvaita arugues for the duality of the material self and the Brahmn (the Supreme being); Advaita argues for the singularity of the two. VishistAdvaita, propounded by Sri Ramanuja argues that while the Brahmn is the ultimate being, and has certain qualities (unlike the advaita philosophy that argues for the entire world to be an illusion) that are distinct from the material self. The Brahmn is the paramAtmA, the ultimate being; and the material self is the jIvAtmA, the minute soul. One of the best metaphors to explain this difference is that of an ocean and a droplet of water. Whilst they are both water, they both have different qualities. The purpose of every droplet of water (in the water cycle) is to reach the ocean; and when the jIvAtmA reaches the paramAtmA, it will continue to serve the Brahmn at His abode.

For this important transition to happen (the jIvAtmA to attain moksha or reaches the paramAtmA), it is imperative that we perform unconditional surrender (prapatti). Is unconditional surrender possible in this material world? Sri Ramanuja exorts us to focus on reflective enquiry (s’EmushI) as well as prayer (bhakti). The Brahmn is available in a variety of forms around us – in the form of SrinivAsa (the abode of shree or motherly kindness), that is visible to you and me in every day life (nitya vibhuti) as well as those acts of kindness that are not visible to us (leela vibhuti). Not just blind following of the philosophy, but a concerted effort at understanding the supreme qualities of the Brahmn through reflective enquiry. Isn’t that learning all about – believe in something after you have thoroughly reflected on it and understood the same?

Qualities of the Brahmn – leadership

This is a verse from the Saranagathi Gadyam.

स्वाभविकन्वधिकातिशय ज्ञानबलैश्वर्य वीर्यशक्ति तेजस्सौशील्य
वात्सल्य मार्दव आर्जव सौहार्द साम्य कारुण्य माधुर्य गाम्भीर्य औदार्य
चातुर्य स्थैर्य धैर्य शौर्य पराक्रम सत्यकाम सत्यसङ्कल्प कृतित्व
कृतज्ञताद्यसङ्ख्येय कल्याणगुणगणौधमहार्णव |

svAbhavikAnavadhikAtiśaya jñAnabalaiśvarya vIryaśakti tejassauśIlya
vAtsalya mArdava Arjava sauhArda sAmya kAruṇya mAdhurya gAmbhIrya audArya
cAturya sthairya dhairya śaurya parAkrama satyakAma satyasaṅkalpa kṛtitva
kṛtajñatAdyasaṅkhyEya kalyAṇaguṇagaṇaughamahArṇava |

This verse enumerates the list of kalyANa guNas (celebrated qualities) of the Brahmn as follows: jnAnam (knowledge); balam (strength); aishwaryam (wealth); vIryam (virility); shakti (power to act intraneously); tEjas (radiance or glow); sowshIlya (pure character); vAtsalyam (motherly love); mArdava (tender affection); Arjavam (honesty); souhardham (positive thought); sAmya (equanimity); kAruNyam (merciful, forgiving); mAdhurya (sweet); gambhIrya (majestic and noble); audharyam (unconditional gifting – liberal giving without discrimination); chaturyam (skill to convince everyone); sthairya (ability to persist on course); dhairya (courage); sowrya (ability to contest alone); parakrama (ability to win without much effort); satya kAma (executing all deeds); satya sankalpa (fulfilling all wishes); krutitvam (dutiful); krutajnata (gratitude); and other innumerable qualities.

What a comprehensive list of leadership qualities! Shouldn’t this list be the benchmark for all our leadership competence assessments?

This is a humble attempt at interpreting verses for the common man. I am fully and truly aware of the limitations of such interpretations – there have been long and deep interpretations of these verses and other Sri Ramanuja’s contributions by learned scholars; and I humbly present my (possibly immature) views as I see them today.

Featured Image source: The statue of Sri Ramanuja opened on 25th April 2017 at the banks of Thonnur kere (the lake at Thonnur), Thondanur, Pandavapura Taluk (near Melcote); picture clicked by the author.

(c) 2017. R Srinivasan

Free … continue hoyenga?

Well, writing here after a really long time. Finished teaching three courses, two mentoring assignments, and two cycles of a customised executive education programme for a client in the interim. A bad throat induced rest (well-deserved, that’s what I would like to believe for myself) gets me to write this short post.

Let them eat FREE

The title is inspired by the advertising tagline of India’s latest entry into the already crowded (dozens of competitors) in a highly penetrated market, Relinace Jio (see here).

Today morning’s story from Rohin Dharmakumar at The Ken is titled Let them eat free! His basic argument is that as regulators and governments are discouraging service and convenience fees, consumers are getting used to free services; which will eventually kill the free markets by taking away the pricing power of enterprises (especially in a highly competitive market).

Over the past few years, I have been studying platform business firms where one of the first concepts one learns in multi-sided platforms is that at least one of the sides of the platform (either the demand side or the supply side) needs to be subsidised to leverage network effects (or mobilise the network from scratch). Is subsidy therefore any different from free? I would say no. There are free lunches, for at least some people in a business. The business may therefore decided to charge someone else for giving these free lunches.

Think free food in temples and gurdwaras… prasads or langars. In fact the mess food at most military establishments in India is called a langar. In a society where there are a lot of people struggling to earn two meals a day, a free lunch provider was a celebrity. The village elder, the temple management, the birthday girl, or just about a casual visitor. Oh, this is religion and philanthropy, you argue. Business is different. Business is for-profit.

Subsidies

Businesses subsidise one side and make money from another side (think Internet search, where search is free, listing is free, and SEO/ Ad is paid); subsidise one product and make money from another product (think Gillette’s razors and blades, HP’s printers and cartridges); subsidise today and charge you tomorrow (think airline dynamic pricing); and/ or subsidise one segment of customers to charge from another segment (Aravind eye hospitals, Robin Hood). Remember, Skype is free (well almost); this WordPress blog is hosted on a free plan; so does your email (well almost all of it).

Is subsidy bad? No, as long as the “customer” who receives the subsidy knows where it comes from. If the business model is clear, and the subsidy receiver knows that she is receiving the “free lunch” because someone values giving it to her for free, it should not be a problem.

Subsidy is bad when someone receives a subsidy in return for particularly nothing. It is inefficient for the entire market when the customers do not know where the free is coming from, what the firm is going to do with all those intangibles (information about me, my behaviour, my preferences, and my network) I provided with them when I signed up.

Government subsidies

What happens when the government gives you something for free? Like the social security? Do you know why it is free? And how is it financed? In countries like India, the annual presentation of the government book of accounts is a celebrated ritual. See the official website here, and the Bloomberg “live” reporting here.

For long, successive governments in the Indian state of Tamil Nadu have been providing freebies to the citizens both as an electoral gift as well as a welfare measure. Most of these have been funded by the state monopoly liquor retail shops, the TASMAC (read here). But when these shops close/ scale down, the state government has to find new sources of funds and/ or scale down welfare spends.

Enjoy it till it lasts

A lot of my friends enjoy these subsidies (for instance a discount from ecommerce companies) knowing very well that the provider is giving it to them from their investors’ wallet. Like the Reliance Jio offer, like the cheap OLA ride to the Bangalore airport, or just the discounted products on the Flipkart’s sale day! They say, enjoy it till it lasts! The assumption is that they would attrition out when the prices rise, or the firms begin charging for whatever was hitherto free. Don’t the firms know this … they are trying to build and leverage multi-homing costs for your products/ services.

Be aware

I would therefore say, be aware; enjoy it till it lasts; use it as a trial; choose whether you want to multi-home and retain the flexibility to signout, and have fun.

Cheers.

(C) 2017. R Srinivasan.

Surge pricing for food delivery: when not to use surge pricing?

This post comes to you from Friedrich Alexander Universitat Erlangen-Nuremberg, where I am visiting for the past one week. I have been teaching a course on Platform Strategies here for the past four years. While in Nuremberg, the question has always been about food, how does a vegetarian, teetotaler survive in Franconia, Bavaria, Germany? To be fair, I have had great vegetarian food here in Nuremberg over the past so many years, and this year has been exceptional – we (my teaching assistant and I) have found great Indian restaurants, that I have had an Indian vegetarian meal for dinner every day of my stay here (except one night of Italian food). Thank you, Nuremberg.

Coming back to food, I was intrigued when I read in the Uber company blog (read it here) that Uber Eats (Uber’s food delivery service) would begin charging customers surge pricing. Much like the way they charge for their  ride-hailing services. I began looking for when and how surge pricing can work. I believe it is a function of customer willingness to pay in part, but most importantly, the platform’s ability to scale up and down service levels at will on the other part.

Economics of the surge

A market is made up of demand, supply, pricing and the norms around exchange. For a market to function, the norms of exchange should be fair and acceptable to the transacting parties. Some markets are defined by the actions of intermediaries who set the norms of exchange, like a stock exchange, a municipal council, or a platform like Uber. In most cases, these intermediaries are third parties in the true sense of the word, “third”, meaning independent of the transacting parties. And in a ‘efficient market’, the intermediary sets the boundaries of behaviours of the transacting parties, and let them transact with little or no involvement. However, in platforms like Uber, the intermediary takes a much larger role, say in pricing. It not only decides the prices of the rides (for both riders and drivers), it also uses pricing as a tool to modify demand and supply conditions. Surge pricing is used as a mechanism to increase supply of cars (by motivating more driver partners to join the system at that point of time), and decrease the demand for cars (by getting riders to either postpone their rides to off-peak times or move away from Uber to other modes of transport, like bus or train). There is enough that has been written about surge pricing, including in this very blog, previously.

Surge pricing in food delivery

Alison Griswold wrote in the Quartz online magazine about why surge pricing for food delivery by Uber Eats is a bad idea (read his article here). She definitely writes wonderful stories about the sharing economy. She argues that once Uber Eats introduces surge pricing, customers would shift away from Uber, and move on to other services, may be even Amazon (with its Prime services). Given that food delivery services do not have high multi-homing costs (customers can simultaneously affiliate with multiple service providers at the same time), and some services may cater to special preferences like a specific cuisine, customers might surely switch in terms of choosing their delivery partner, their restaurant choice, or both. But that can be overcome by just simple speed and other aspects of service quality.

However, her main argument is that the economics of surge pricing might work for increasing more delivery partners to join the system in times of peak demand, but might not get the restaurants to produce more food. She avers that increasing the supply of food available for delivery is not the same as increasing the supply of delivery partners. Fair point. But, don’t restaurants anyway plan for increase in food supply during lunch and dinner times? Don’t they build in some buffer of raw material, ingredients, and/ or semi-processed food before they toss them on the stove? Aren’t there some limits to which they can extend?

Where does surge pricing not work?

Surge pricing works in markets where the intermediaries can, at least at the margin, increase the supply of goods and services and/ or decrease the demand for goods and services. In the case of ride-hailing services, surge pricing can shift people away from ride-hailing to use buses/ trains or just walk. Surge pricing works best when there is idle capacity not available to the users – when the driver partners are present but are themselves taking a break (not logged in) and are not available to take rides. Surge pricing motivates these ‘idle’ capacity to join the market, and restores the balance. In summary, surge pricing works when the demand side has ‘substitutes’ and the supply side has ‘excess capacity’.

If either of these conditions are not met, surge pricing might not work. Take an instance when a cricket/ football game or a concert ends in the middle of the night, and there are no public transportation options. Any amount of surge pricing is unlikely to reduce the demand for cars. Or try surge pricing of rail tickets in Indian trains. Any amount of surge pricing is not going to motivate the rail authorities to increase capacity to balance the market (I am not even convinced it should be called surge pricing – it is just differential pricing of different tickets, depending on whether I am the first person booking the seat or the last). In both of these conditions, differential pricing might be grudgingly accepted by the transacting parties, without any impact on the demand-supply mismatches. Take for example, Kayani Bakery in Pune, India, where by noon they are sold out! Surely, no amount of surge pricing is motivating these businessmen to increase supply. In fact, the scarcity increases the demand for these biscuits.

What are the welfare effects of surge pricing?

Scarcity principle tells us that when supply is far less than demand, prices will rise to ensure that supply matches demand. In an ideal world, both supply will increase and demand will fall. However, in contexts where supply is limited or inelastic, it will be demand that has to come down. In the case of essential goods and services (inelastic demand), prices continue to rise to point where only the wealthy could afford it. This is precisely the reason why governments indulge in market intervention mechanisms. For those interested in how commodity prices can bring down governments, read this!

The lesson for platform business firms: engage in surge pricing only when you can work towards increasing supply, or your demand side has (at least imperfect) substitutes.

(c) 2016. Srinivasan R

Will you look for jobs in Facebook?

It has been a wonderful week so far with my lectures on Platform Business Models at the University of Rome Tor Vergata over the past two days. In one of the discussions, there was a discussion about network mobilisation, and a perceptive participant quipped about how successful Facebook can be in a variety of businesses. I have been maintaining that Facebook and LinkedIn are in independent markets, with their own unique needs, and therefore would never end up competing. However, this discussion on what Facebook can do with the big, small and thick data it has about users – ads, shopping, or even jobs set me thinking.

Winner takes all markets

One of the most common discussions on platform and networked businesses is the prevalence of monopolies, in what we call as “winner-takes-all” markets. There are three conditions for these markets to satisfy to qualify as “winner-takes-all” markets – multi-homing costs should be very high; network effects should be strong and positive; and users usually do not have any special preferences (read more about it here). Social networking (with peers, friends, and family) is a winner-takes-all business by all counts – it is difficult to affiliate yourself with multiple platforms; network effects are strong and positive; and Facebook is used for pretty much everything – no special preferences.

Professional networking space, on the other hand, would have different economics. Multi-homing costs are sure high, but not so high. Especially when people have multiple identities … for instance a CEO by the day and a triathlon by the evening; or a professor of law and counsel at the same time. And they could possibly have separate professional networks, right for each of their interests, right. On top of this, online media provide us with our own masks, that enable us to insulate the two worlds when we choose to or integrate when it suits us. A sort of maskenfrieheit, a German word that translates to “masks provided to us by the power of anonymity”. Most of us surely live in multiple worlds, leveraging our own maskenfreiheits. Network effects are sure strong and positive, and in addition to social networking, professional networking business also has a significant extent of cross-side network effects (from potential employers and followers). There are special preferences in professional networking – there are those wo write for others to follow; some others just read and follow and minimally engage (a occasional like here and a share there); and there are few INfluencers (as LinkedIn calls them). So, it makes logical sense that a professional networking business is not a winner-takes-all business, and should be prepared to be attacked by a variety of competitors.

LinkedIn, for its part has done it bit, I would say. It has significantly expanded its reach to college students; allowed for writing (competing with blogs); jobs (competing with focused recruitment sites); shares, likes, and comments (competing with social networking, including micro-blogging). And its merger with Microsoft recently would hopefully provide it more teeth to bite in.

Facebook enters the jobs market

But, how does LinkedIn compete when the ubiquitous Facebook decides to enter the jobs market? I recently read this report on TechCrunch (read it here) on how Facebook is entering the jobs market. With its size of members’ network at more than thrice that of LinkedIn, Facebook can unearth more and more passive job seekers. Those of you who are not actively seeking a job, but would be interested in testing something out, if is offers great roles, salaries, titles, locations, or just more fun that your current role. In fact, the value proposition of LinkedIn was just that – one keeps building a stack of endorsements and a network that will then actively seek you out, rather than the job seeker reaching out. Facebook seems to have imitated just that – its profile tags is much the same as LinkedIn endorsements. Everyone sees the similarity … read the Fortune Business report of July 2015 here.

Is the professional networking space contestable?

Firms competing across business lines can also be explained using the theory of contestable markets. The simplest definition and explanation of contestable markets I could find online is on this page. These markets are characterised by low barriers to entry (like no economies of scale) and low barriers to exit (like no sunk costs), and therefore allow for new entrants to adopt a hit and run strategy. Incumbents typically protect their turf using asymmetric information (some specific information/ competence) that the new entrants do not possess. If we were to look at professional networking space as a contestable market, then LinkedIn had it all covered as an incumbent. Facebook anyway had a variety of small and medium businesses maintaining pages to connect with its customers; and all it had to do was to extend the same feature to job applicants connecting with the firms. Much like how a firm would announce a new product or a discount offer, it could advertise jobs on its Facebook page. Just that Facebook is trying to overcome the asymmetric information bit with its Profile Tags feature to quickly imitate LinkedIn’s endorsements (it is not available in all countries, yet). Without that Facebook would not be able to customise the feed to its readers – you would get only “relevant” job offers on your Facebook timeline, now that it would have your Profile Tags.

Facebook jobs, anyone?

So, would you apply for jobs using Facebook? I for one know a lot of active seekers and college students invest in building their LinkedIn profiles, rather than “wasting time” on Facebook. Facebook is for casual chit-chat with friends and family, sharing selfies, religious views, political statements, and even late-night party stories. Not the place where I would imagine a lot of people would apply for jobs. Will you let your maskenfreiheit down?

But hang on, what about those who do not have a LinkedIn profile? What about those who are logged on to Facebook for ever on their smart phones? What about those who use Facebook to gather information about jobs and then apply for the same using traditional job sites, just email, or through their LinkedIn profiles? Small and Medium businesses might be able to attract a lot of undifferentiated talent (I’m not talking about blue collared workers only) through Facebook, if this succeeds. And what do dedicated job sites like Monster.com do?

Facebook surely has big data, small data (or thick data) and even the right data (after my posts of the last two weeks, this HBR post on right data appeared online!). Exciting times ahead.

Cheers.

(c) 2016. Srinivasan R.

FirstCry.com: Leveraging the power of offline

In my blog post last week, I wrote about how a hybrid online and offline strategy is useful for collecting small data. As a couple of my readers pointed out, what marketers and strategists call small data, ethnographers and sociologists call as thick data. Honestly, I had not heard of thick data. @fernandogaldino introduced thick data to me. I dug through the online references on thick data, and realized we are talking the same thing. Exactly the same thing. Thank you Fernando! So, I am going to continue using the term small data (that is what I have read academic articles about) with the caveat that small data is also thick data. Last week, I promised to delve deep into FirstCry.com and its online-offline strategy. Here it goes.

FirstCry.com

The firm was founded by Supam Maheshwari and Amitava Saha in 2010 as a pure online venture. By 2011, FirstCry.com opened its first offline stores. In an interview to TechCircle, co-founder Supam Maheshwari elucidated how a vertically focused ecommerce firm could survive and make money in a market dominated by horizontally spread competitors (you can read the interview here). He talked about replicating Quidsi’s business model in the Indian market, by owning a set of vertical markets like diapers.com and soap.com. In replication, firstcry.com has a sister website goodlife.com. The key difference, he said, between the Indian and the US market for baby care products was that, more than 95% of the products were imported. In fact, that was the seed for the enterprise – his own difficulty in finding good quality products for his child in India, whereas he could buy a lot of them during his international travels. That effectively makes this business inherently inventory-heavy. One needs to leverage economies of scale and scope in sourcing, hold inventory and invest in logistics to be able to service customers across the length and breadth of the country (read about firstcry.com inventory model here).

Omni-channel strategy

Here is where the omni-channel strategy helps. Instead of keeping inventory in dark warehouses, ready to be shipped, it was possible for firstcry.com to open retail outlets in tier II and tier III cities (where real estate was also likely to be cheaper), where ecommerce penetration was not as much as the tier I cities and the metros like Mumbai, Delhi, or Bangalore. The inventory holding was thus distributed across the various franchised retail outlets. The outlets also provided customers with the look and feel of the products before they bought them – you need to appreciate that baby apparel and shoes dominate the market, only to be followed by toys and diapers. Clothes and shoes … when was the last time you bought your own shoe purely online? Inventory provided increased footfalls to the store, created brand awareness, and inventory off-take. The decision to have the same prices between online and offline stores, coupled with large touch screen interfaces to shop online from within the offline store could have provided exponential growth in traffic and sales.

Promotion: The FirstCry Box

Firstcry.com began promoting using traditional mass media – television and online ads. They invested in Bollywood’s longest serving (possibly) celebrity, Mr. Amitabh Bachchan as their brand ambassador and launched a few television advertisements (see some of their ads on YouTube here). However, they soon realized that mass media advertising was highly expensive and yielded low returns for a niche range like baby care products. That is when the idea of the FirstCry Box was born. The FirstCry Box is a bundle of some essential products that the mother would need during the first few days of the baby and mother reaching home from the hospital. Firstcry.com has agreements with over 6000 hospitals, through which these FirstCry Boxes are gifted to the new mothers, congratulating them on the birth. These boxes also contained gift and discount coupons from major brands of baby products, that the parents could redeem at either online at firstcry.com or any of their retail outlets. This ‘welcome kit’ to parenting provided firstcry.com a significant opportunity to build brand equity and recall amongst the over 70000 mothers receiving these kits every month. Some marketers call this permission marketing (read about it here), or direct-to-parents strategy. For me, it is a wonderful platform, a two-sided platform mediated by firstcry.com. Parents, especially first-time mothers, are initiated into parenting with the help of these grooming products (basic diapers and lotions) and the gift coupons for free. The new mothers as a subsidy side is being financed by the brands that provide the products and coupons to be included in the box and act as the money side in the platform. For the brands, this is highly targeted sampling of their products, and most mothers would stay loyal to quality brands/ retail stores in baby products. In the entire transaction between the mothers and the brands, firstcry.com benefits significantly in three ways: (a) store loyalty resulting in increased sales, (b) small data about how these mothers use these products, the basket, frequency of purchase, and willingness-to-pay for quality; and (c) good quality prediction of demand in specific geographies, leading to efficiencies in inventory and supply chain management practices.

By the way, such welcome kits are not entirely new – a lot of employers have been on-boarding their employees with such welcome kits. I first heard/ saw such welcome kits when I was part of a team that delivered a customized training programme for the ITES service provider ADP India, a few years back. It was fascinating to see how the entire family was on-boarded into the firm! Not just ADP, a variety of other new age firms, I see have adopted this practice (read this article on how some Indian organizations welcome their employees). I wish I was welcomed like this by my employers!

Are hybrid models here to stay?

I would say, yes. We saw how Amazon was opening stores in our blog last week. We also discussed how Amazon.in was using firms like StoreKing to reach the Indian retail hinterland. I read last week that their Indian competitor, Flipkart.com was also opening offline store to reach users in small cities (Flipkart to open offline stores as well). And in vertical markets like baby products, it has become all the more important to target your promotion very narrowly, and focus on the backend (inventory, supply chain, and logistics) efficiencies, while at the same time achieve scale.

Is vertical ecommerce a winner-takes-all market?

Three industry conditions define a platform market as a winner-takes-all market: presence of strong cross-side network effects, high multi-homing costs for the users, and the absence of special requirements. The baby products retail market is dominated by imported brands, is a highly fragmented industry, and the brand owners are dependent on their retail partners to promote their brands. The demand for these products are relative price inelastic, and consumers would be willing to pay premiums for sustained quality and reliability. An aggregator platform like firstcry.com would significantly aid in establishing and reinforcing the cross-side network effects between the brands and consumers. Second condition – the quality and reliability concerns of the parents would ensure significant store loyalty and brand loyalty. As long as there are no serious concerns, consumers would be loath to switch; and when the fill rates are high (there are no stock-outs of items that they want to buy) in their preferred stores, would not multi-home. In other words, consumer switching costs for brands are high, and as long as these brands are available with their favorite retailer, they would not shop from multiple outlets. And most infants have the same needs – diapers, creams, lotions, oils, and basic toys. Special preferences begin showing up only when they ‘grow up’. Some of them don’t ever grow up, but that is a different matter!

Firstcry.com and BabyOye merger and further consolidation

Given the industry conditions of geographically distributed year-round demand, operational efficiency and leveraging economies of scale and scope become key success factors. Consolidation is inevitable to achieve both backend (sourcing, inventory, and supply chain/ logistics) efficiencies as well as frontend scale (online and offline stores distributed across the country). That is why we would see waves of consolidation in such strong vertical markets. Like how firstcry.com and BabyOye merged their operations, I agree with Supam that this market will see more and more such mergers (read his interview here).

Lessons for enterprises focused on vertical markets

Based on what we have discussed over the past few weeks, I would urge enterprises focused on vertical markets (like firstcry.com) to (a) seriously consider your business model to include online and offline consumer touchpoints … for instance, online furniture store, Urban ladder is ‘pivoting’ to offline stores (read the news here) and are positioning their offline stores as customer experience centers; (b) invest in collecting and analyzing small (or thick) data through these omni-channel (or hybrid) business models; and (c) critically evaluate if the market conditions favour winner-takes-all dynamics.

Hope my readers from India and the diaspora had a great deepavali festival! Greetings from Bangalore.

Disclaimer: I am in no way related to FirstCry.com, Goodlife.com, its investors, or its founders.

(C) 2016, R. Srinivasan