How Low interest rate can be bad for small business - 2

In a 2012 post with same title, How Low interest rate can be bad for small business, I had explained mechanics of how small businesses are denied capital BECAUSE of lower interest rates. This was summarized from my book Subverting Capitalism and Democracy. Over the years few readers have asked for further explanation. So here goes.

Demand for projects

Let us look at the following schematic.

Capital Quantum and return

The diagram shows the amount of capital demanded and its possible rate of return. The distribution is made from capital requirements of various businesses of various sizes. The financed part is the blue rectangle. The width of this rectangle and its location is determined by various factors.

Now our experience tells us following details - (1) smaller businesses have higher risk profile whereas larger businesses have lower risk profiles; (2) smaller businesses have smaller quantum requirement whereas larger businesses have diverse capital needs; (3) as a corollary projects with large quantum of capital requirement and low return are dominated by large corporations.

Therefore, let me quote what I said earlier:

How low interest rate leads to mal-investment
A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed.

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures.

Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns. 

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy.

The Mechanics

When interest rates are low this rectangle starts more towards the left. This is space where there are weak business models, those that are viable only in low return scenario. This space has irrational mega-projects of large businesses like debt financed share-buybacks etc. With the superior credit rating of large businesses these projects crowd out the smaller businesses.

As the interest rates rise the rectangle is pushed rightwards. In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios. 

Are few projects with consortium lending more risky?

The answer to this question is easy if you understand it from banks perspective and not from bank manager's perspective. From bank's perspective more the number of projects it finances the more the diversification possibility and thus lesser the risks.

But this has higher risks for bank manager who has to stick out her neck for each of these projects. From bank manager's perspective fewer the projects and more the number of borrowers approving the project as credit-worthy lesser the risk for bank managers. But this means more the risk for the bank (concentration risks).

In sum

The cumulative effect of all these is that at low interest rate the credit is denied to small borrowers at the expense of irrational mega-projects of large businesses. When the interest rates rise, as they always do, these projects turn bad and become a drag on the economy.

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Urban Development problem in India - the lack of proper Development Plan

Recently, I had the opportunity to examine the Draft Development Plan released by Maharashtra State Road Development Corporation (MSRDC). The plan is quite badly designed. Yet, what hurt me more was the fact that this plan was developed for Special Planning Area (SPA) which is not developed as much so the development is almost green-field urbanization. And yet, even when we are given a clean slate we make such primary mistakes in planning. I wrote about the shortcomings in an Article in Moneylife.in titled "How can smart cities be built on dumb development plans?"

I have looked at the population, water demand estimation, power demand estimation, waste estimation, transportation planning etc. On every parameter this plan falls short. Have a read and leave comments.

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My two favourite HR people!

I was listening to Masters in Business and discovered Patty McCord. Patty is former HR head of Netflix. She doesn't speak HR she speaks innovation. Listen to the MiB episode with Patty Mccord here. It is worth it. THIS is what HR should be.

My suggestion:

1. Ask your HR manager if he/she knows what is your job like day-to-day. ( analyse financial statement, work on new toothpaste launch, etc.) it has to be specific.
2. Does he/she know who are your clients? 
3. How do you make money for the firm? How much?

And the next one is of course EvilHRLady.

Knowledge improves Risk Mitigation

Improved knowledge of business domain: A person who has better knowledge of the nature of risk is better placed than person without any knowledge.  What you want to know is - where are the bargaining power centres, do you understand them and who owns them and whether you can change those. Given my knowledge of pharma and allied sectors, I do not invest in pharma.

Improved knowledge of parties involved: If you know the founders well, you may be able to take higher risks than otherwise. You may also "know" competitive landscape - what they think, how they act.

Mechanisms to hedge risks are available and known: Hedging mechanisms are not always obvious. Not always "options" will solve your problem. Your knowledge must be comprehensive enough to determine what are the hedging mechanisms involved. Sometimes you can create an alternate product line to improve your bargaining power. 

With knowledge, you can better understand the risks. For you, the risks will be lower than others.

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Law and Order - The missing reform

Manas Chakravarty has an article in Mint title IBC Ordinance a blow against the Promoter Raj. It talks about new Insolvency and Bankruptcy Code reform.That raises some prospects of execution problems.

I think Modi government faces lot of execution problems because it has not acted to root out corruption. Here is my solution I wrote for Moneylife. Do have a read and leave a comment.

Notes:

World Bank report on Reform in Georgia

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Farmer suicides and loan waivers - can we solve it?

Farmer suicides have brought the problems facing the farmers to the fore. Indebtedness has been highlighted as one of the dominant problems for suicides. As a corollary, governments have taken populist turn towards loan waivers. This is not the first time the farm loans have been waived. But can we do something to make it the last?

I reviewed the research on this topic and summarised them in my paper. I found there are a lot of problems facing agriculture. To put it succinctly, Indian agriculture suffers from: i) poor productivity, ii) falling water levels, iii) expensive credit, iv) a distorted market, v) many intermediaries who increase cost but do not add much value, vi) laws that stifle private investment, vii) controlled prices, viii) poor infrastructure, and ix) inappropriate research. 

These are basically symptoms of two fundamental issues with agriculture. First, farm risk management has gone wrong. Second, there is lack of coordination between various parts of agricultural value-chain. Thus, farmers do not respond to changing prices and market dynamics pro-actively. They also bear higher costs for post-harvest coordination in the value-chain like transportation, packaging, etc. 

Farmers needed to become better at risk management. They should use futures prices at the crop planning stage itself. At harvest stage a mix of contracted sales, and spot sales to can maximise realisations. They also needed more reliable availability of inputs, of credit etc. All this meant we need information – different types and large quantum of information like futures prices, weather forecasts, demand estimations, pesticide usage guidance, seed knowledge, planting knowledge, etc. AND, this information had to be available to farmer when he/she needs it.

But information is only ONE part of the problem. Farmer also needs physical inputs to reach at his remote farm. So, fertilizers should be delivered on time. Farm insurance should approved. Seeds, pesticides should reach the farmer on time. It means the value-chain partners must be available and acting reliably consistently. It meant the value-chain participants need the farming process to be visible.

There is universal agreement about risk associated with dealing with commodities. It means despite much effort many times farmers will fail. The question is then – can they fail safely? 

The corporate world has solved this issue through use of limited liability vehicles. So can we apply that to the farmers? I believe, a limited agricultural bankruptcy mechanism should act like a safety net for farmers. However, we don’t want farmers to hide personal failures within agricultural risks. Hence, we want farmers to separate personal and agricultural assets for this purpose of limiting liability.

I think we can fix these using an information system –an ERP-like solution for agriculture to help assist the farmers. Such system will reduce the coordination costs, improve information availability and increase the scale of operation allowing formal economy to step in and help farmers. With ring-fencing of risks, low cost collaboration, timely information, we can help farmers into a positive spiral of profits-investment-productivity. I sketch out the schematic of such a system called Smart Agriculture Management System (SAMS) in my paper.

This issue is important. Please read the paper, I tried to keep it as short as possible. Please make suggestions for improvement. If you think SAMS will work then do spread the word.

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Unmanufacturing Revolution - Is it the future?

Today I came across an article about Apple wanting to sell refurbished iPhones in India. The author, Tim Culpan, goes on to state that India could disassemble the iPhone for Apple. In this, there could be much more value. I agree.

Unmanufacturing is organised processing of manufactured products to their basic salvageable state. It is not new. India is a leader in Ship-breaking. There is no reason to believe we can do far better in unmanufacturing for electronic goods too. For quite some time we have focussed on manufacturing jobs and manufacturing contributing to the GDP. There could be substantial value in this activity too. 

Electronic waste processing is just one aspect of the work. As companies focus more on sustainability and recycling, we should be able to process all products - automobiles (cars, ships, aeroplanes), electronic goods (computers, phones etc.) durables (washing machines and etc.) to demolition (processing of buildings etc.).

This is not waste processing - which is a different and also lucrative business. This is about high-value items being disassembled to recycle the critical parts such as precious metals etc.

Done at a large enough scale, in a proper systematic manner, it can open up huge opportunities for employment.

  

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Reorienting Singapore - Ideas for a Future Economy

Singapore is unique country. The Singapore government works better and more efficiently than its corporates. So naturally, it wasn't surprising to find the Government of Singapore exploring new policy options to ensure Singapore continues its development. The urgency with which Singapore Government is looking for these new themes is indeed creditable.

There is a Committee on Future Economy. This committee comprises many thinkers and business leaders. The committees presented some ideas at the IPS CFE conference. I am parsing through the ideas in the sessions - all make interesting food for thought but not out of the ordinary. Be ready to sift through jargon and buzzwords while picking the best ideas.

Here are some of my thoughts on these things:

Keeping aging population employed, relevant and highly paid

First we need to abandon the concept of "job" or employment using same skills over entire lifetime. Some skills stay relevant and even appreciate with practise. Surgery, tailoring, etc come to mind. There not much is required to be done so long as the skills remain relevant. But even master tailors and surgeons will also need to be aware of the advancing robotics wave. Thus, we definitely need to reskill the greying workers. The question really is how to reskill in a way that augments the skills they have acquired and makes these workers into super-constributors. One way is to take the skills they have acquired over lifetime and let them impart these skills to new workers. In areas where robots are taking over, these workers can evaluate the robots or augment the research in robotics.

Opportunities for section of population with varying skills

How to ensure employability of part of population of varying skills? 

1. Take the art route. And we need not ignore the digital art - Singapore can become a hub of say world class web-designers, interface designers etc. The key question is what domestic set of skills can be made available to the world that will have sustainable advantage? 
2. Dragon purse effect: Allow citizens to create something artistic and using SMEs explore if it finds relevant demand in the world. If yes, then it can be expanded into a proper global scale product. This is like next step of kickstarter - a place where entrepreneurs can innovate new products and try it on smaller scale. A dragon purse was a hit world-wide. So what can be the next dragon purse.
3. The key question will be how to ensure that the core of what is found in Singapore can be deployed globally in such a manner that benefits will flow to Singapore? 

Reinventing Construction

Singapore is as unique as Netherlands in the fact that it has natural constraints to deal with and has the technology and capital to solve the problem. Netherlands also has innovative ideas. Does Singapore? I think so. Just that we need to look widely.

1. With an eye to global warming, Singapore needs to raise its height by about 5 meters above mean seal level. It means gradual planned buffer creation across most of the city. This area needs to be explored.
2. Singapore can invest in breathable green materials construction techniques for office and residential buildings. The idea is to use architecture, materials and structural engineering to reduce (and if possible eliminate) requirement of air conditioning.
3. Urban agriculture idea is not new. But creating enabling buildings is not given as much a priority. By the looks of it, the future buildings will have to work with plants, crops, animals and poultry. Again needs investigation and trials. A country like Singapore can effectively be leader of such technology.

Hi-tech Industries such as medtech, Predictive Tech etc.

There are a few hi-tech industries that can play to Singapore's advantage - high-tech manufacturing and pure high-tech industries.

1. Medtech is high-tech manufacturing type industry. What is unique about medtech type industries is that they are highly technology dependant and thereafter entire global demand can be serviced through small worker-less fully robotized factories.  Chip-design industry has similar characteristics. While, the intellectual property is difficult to replicate, the production is easily replicable with cheaper capital and easily available robotics. When medtech wants to retain its Singapore advantage then it must create a network of med-tech testing environment (can test in China and India - will be lower cost). Thus, you leverage proximity and access (to ASEAN, India, China, Indonesia - populus markets) for testing and deployment.
2. Similarly, a pure high-technology industry includes Predictive Technologies is rightly highlighted as relevant industry for Singapore. These are pure high-tech industries. Another like Algorithm design, data analytics, etc. will make high return, small team tech companies possible. 
3. For both types of industries, the research in engineering sciences and applied mathematics is essential. Universities can highlight potential candidates and these bright candidates may then be financed to create startups locally.
4. These companise individually may be small teams but collectively will be large employers and require plethora of suppert services that will be employment generating. 

Innovation - always by the SME   

SMEs are preferred entities to undertake innovation. Allow SMEs to fail fast, fail often and fail safe - and then wait that is all it takes for innovation to flourish. Celebrating failure is as important as celebrating success. Yet these three things - fails fast, fail often and fail safe require enormous infrastructure and social development. 

1. Principle-based regulation: The search for light-touch regulation is not easy. Light touch regulation implies a quicker resolution of liabilities and protection of genuine risk-takers from being unnecessarily hounded. That should suffice. Other aspect of light touch regulation are actually ease of doing business which are fairly well developed in Singapore. It is also better to guard against misuse of personal health and financial data than regret the "light touch" later. So right-touch is better than light touch. These aspects are easy to deal with using "principle based regulation" letting the courts follow the spirit of the law rather than rigid enforcement of letter of law. That is advantage of the common-law system as practised by Britain and US.
2. An evolved Intellectual property law framework: Hi-tech industries along with innovation as a focus implies creation of intellectual property. Intellectual property can quickly devlove into what is referred to as "problem of commons" or "gridlock economy". In either case the innovation suffers and the innovator lands in trouble. To counter this, a quick-resolution mechanism for intellectual property is required - starting from registering unique IP, resolving disputes and trading IP. 
3. Government contribution: Government can give access to the international patents database so as to prevent duplicate research and ensure that when IP is granted in Singapore (certain class of IP) then it is really at the cutting edge of the stream and thereafter can be traded across the world.

Future of Work - Implications

It is well accepted that future work will be more like a free-agent rather than life-time employment at specific skill. It will be multi-skilled (may types of work at once), simultaneously (many jobs at once) and within multiple teams that come-together and get disbanded at hyperspeed. All this requires development of infrastructure. 

1. A skill repository is essential: The construction value chain is an example - the developer knows who is best architect for the job, who is a good contractor, electrician, plumbing contractor etc. and they all come together for a project (while some may be working on more than one project) to deliver a unique product. The question is why cannot other businesses do it. It is because transaction costs are too high. If there were a skill repository (indicating who has the best skills for a particular job) and it was easily accessible, then you could hire these experts easily (band and disband easily). 
2. Legal innovation required for future work: Future work also requires development of standardized contracts so that both parties are protected in such transaction. It also requires grievance redressal and dispute resolution mechanisms. It also creates a new set of jobs that addresses background checking, feedback taking, maintaining work histories and customer reviews. Lets say Singapore were to partner with Linkedin and augment the database Linkedin has with fact-checked database. Wont it be easy for prospective employers and service seekers to hire those people? Data on new skills sought by the employers can be mined, appreciated for long-term skill development and it can become input into human resource policy.
3. Safety net: With firms not able to help create employee safety nets, it may be required of the government to create a mechanism for these free-agent workers to bolster their safety nets. Some hand-holding and some compulsion may be necessary so as to ensure that longer lifespans are happier lifespans.

Second mover/ Fast Follower strategy for innovation

Seond mover or fast follower strategy made famous by Panasonic case in business schools has some merit for flexible economies. But sadly the fast follower days are over. These days winner takes all approach is dominant. A more relevant model for this era is the "long-tail" model. There is only one facebook. Singapore may heed the story of mySpace which was the first mover, but lagged in innovation and quickly faded into obscurity. For most of the industries Singapore intends to rely on, this is the reality. In such a case, a fast-follower or second mover strategy cannot help Singapore. In fact Singapore needs to be a leader and additionally be flexible to keep its advantage.

Globalisation and Regionalisation

Singapore is welcome in China as well as India. Singapore should use this advantage to develop supply chains which are regional and supply global products with these supply chains. Just like the Apple HQ is at Cupertino but production is in China, we can have highly value-adding HQs in Singapore and production in China, Vietnam Indonesia, India tc. Engineering excellence is not geography centric. The passionate drive to make your product superior can be recreated anywhere. What you need is an environment where entrepreneurs can fail safely without being judged harshly (socially more than financially).

I think the Future Economy deliberation has just started. Maybe if they could ask me for what I think! ;)

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms". 

Why is resolving Non-Performing Loans (NPL) is so difficult?

The management/resolution of NPLs has acquired renewed focus with banking sector under stress for many years. The Economist comments on it this time about Italy's NPL problem. More significant is the commentary on various approaches, IMF recommendations, KKR's Pillarstone initiative etc. making it a must read. But it misses some quite important issues with respect to NPLs in general.

Failure of NPL liquidation - some blame lies with Accountants

The PwCs, EYs, Deloittes and their ilk must take some blame. Many of the bad loans have accounting folly at its heart - some deliberate and some not, some before loans are made and some after. Time and again, accounting firms have washed their hands off their audit responsibility and liabilities arising therefrom. Recently some firm has sued PwC for their failure to report material issues. If auditors completely trust the company managements they are auditing, then the purpose of the audit is not satisfied. 

The shady entrepreneurs

The proportion of shady, shifty characters in this distressed assets pool is quite high. Some distressed loan assets are deliberately impaired on the books for tax fraud or money laundering. Data mining algorithms cannot detect this - even analyst cannot easily detect this. Such frauds have to be sniffed out - at least till Artifical intelligence becomes more robust.

Slow courts and costly Alternate Dispute resolution (Arbitration, mediation etc.) mechanisms

Invariably, a fair proportion of the distressed asset pool goes for legal resolution. NPL problems are higher in countries with weaker judicial controls, higher cost dispute resolution. The process of dispute resolution quickly unravels both the ability to pay and gives a remarkbly clear insight as to the intention to repay. However if the process is too slow and too costly, it defeats the purpose. This is a problem in Italy and also in India.

Much blame lies on Incompetent Banks

The substantial blame though must lie with the bankers:

1. Lack of accounting analysis skills: Many banks which make loans cannot make proper assessment of accounting statements. Data mining algorithms are good at assessing the "ability to pay". They cannot assess the "intention to pay". Lack of Intention to Pay has created many NPLs.
2. Illogical the use of collaterals: Banks are notorious in having collateral that is highly correlated with loan asset itself, over-valued or pledged in part to many. This is a childish mistake to make for a professional setup. At times, an intellectually superior form of syndicated lending (the whole syndicate holds one collateral) is used. When trouble strikes the legal disputes arise within the syndicate itself. 
3. Poorly-constructed contracts with borrowers: Such contracts make the payments unpredictable in quantum and timing thus surprising the borrower. It quickly cascades into penalties and surcharges and it goes downhill from there.
4. Too Centralized decision making as to loan eligibility: Most borrower eligibility tests are done centrally these days. Thus it leaves no incentive for the bank manager / officer to dig deeper into the borrower's records. It makes the incentives wrongly aligned.
5. Flawed loan portfolio construction: Loan portfolios are too correlated This is a result of too much market focus. Banks push certain products that they find easy to sell - consumer loans, credit cards, personal loans etc. When the lending starts concentrating they do not quickly take corrective actions to balance the portfolio. If the banks' entire portfolio comes under stress at the same time, it cascades into more distress.

Basics of borrower assessment

Any borrower assessment has two component - ability to pay AND the commitment or the intention to pay. Sometimes the last two differentiated. The ability to pay is well understood which refers to  the capacity to bear the repayment of the loans. The intention to pay tries to determine if the borrower intends to cheat or not. The commitment to pay points to whether the borrower intends to pay  but disputes the computation of the payment and hence may have withheld the payments - committed but not paying, or the borrower does not intend to pay at all and is finding loopholes to delay the foreclosure process.

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Banking and the Post Office

Yves Smith blogged about post office providing banking services. Here is my take on it.

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How Low interest rate can be bad for small business

Summarized from the book (click to buy)

We are told that when interest rates are too low, they are encouraging entrepreneurs to take risk.

However, this impacts the business models differently. At one end are business models, like infrastructure projects, that cannot add threshold value in the initial years of the venture. The low interest rate regime, allows a valuable gestation period for such business models. Often, government artificially lowers interest rates for such projects. At the other extreme, there are weak business models, those that are viable only in low return scenario. These business models, however, die out once the interest rates start rising. In between, there are experimental and innovative business models. Some of these use the low interest rate period to forge better, more robust models. Such businesses thrive later. Others, however, end up going bust. The role of banks is to identify each of these business models and fund them while appropriately mitigating the risks. 

How low interest rate leads to mal-investment 

A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed. 

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures. 

Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns.  

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy. 

In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios. 

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Chris Anderson explains Free / Freenium

A lot of people get confused with Chris Anderson's book free. Particularly because his book is free. Here he explains the concept in details. A fantastic read about changes in business models.
Charlie Rose - A conversation with Chris Anderson of Wired Magazine

Newer Orgnisation Structures

One of my pet implication of the global slowdown is changes in organization structures. I think this is one of areas where organization-citizen relationships are going to be redefined. We are going to see restoration of balance in this relationship. Currently, organizations have disproportionate leverage that is being misused. It means new value-chains, new types of organizations based on skills.

No one has noticed but Apple just did that - the application part was moved out of the organization into public domain - modifying the traditional value chain that Friedman mentions.

Further I think organization-employee relationships are going to change fundamentally. We will have new loose forms of organizations that can fail easily and not become tighly controlled - economic behemoths that can hold entire economies to ransom. The new form of organisation will most likely have Schumpeterean creative destrution switch built into their DNA making them more efficient, vibrant through fail-fast, fail-safe means.

The economics of labour market intermediation | vox - Research-based policy analysis and commentary from leading economists

David Autor has a fantastic post on Vox on economics of labour market intermediation. Labour markets are imperfect and they are kept that way by interest of recruiters and employees. In the end both loose but still there is enough weight in status quo.

Let us consider an employer and a prospective employee. There is no way for the employer to know the employees performance in previous organisation. Therefore the metric is salary drawn currently.  Now if, by any chance, an employee accepts a job with lower salary then his salary growth is lower! This appears unfair - but its actually a manifestation of inefficient market at work. The only way this situation corrects is when imperfection on other side - i.e. you have a desperate employer. 

As per my experience the intermediaries actually twist this situation to the benefit of the employer. Hence most of the time employees distrust HR managers and intermediaries. That is the reason salaries are secret. Often even though companies treat everyone fairly - employees still feel distrust.

In sum, there needs to be two areas of research in this. First - does this behaviour actually benefit the employer at all. Second - does this distort the labour markets to an extent that it impacts the economy. My intuitive guess is no on first count and yes on second. 

Links:

The economics of labour market intermediation | vox - Research-based policy analysis and commentary from leading economists.

Use value Vs sale value and Innovation

GDP, the scorecard of economic performance, does not adequately differentiate between Use value and Sale value. This can be illustrated with a simple example.

Use Value Vs Sale Value - Example

The GDP contribution of one coconut is sold is price of that coconut let say Rs 6/-.

A village buyer then drinks the water and eats the fleshy part of coconut, use outer fiberous cover as scrubber, uses the hard shell as a soap holder and later uses all of this as fuel to heat his bathing water.

A city buyer, typically, drinks the coconut water and eats the fleshy part and rest of it is discarded as garbage.

Now the use value of Rs 6/- is totally different in each case. This is what Karl Marx explained, in his paper called "Capital", the difference between use value and sale value. In this difference, or the divide between use value and sale value, lie many possibilities for innovation both for economic learning and entrepreneurial innovation.

Economic Learning opportunities - the hypotheses

First is related to computing GDP numbers. This divide implies that economies with higher ability to extract use value should feature higher than they actually do. Consequently, the algorithms used for estimating this value need to be tweaked to accommodate this difference.

Secondly, we need to interpret the GDP numbers carefully. A country may be actually creating more value than the GDP suggests.

Thirdly, I wonder if that is why economic development is accompanied by stress and loss of happiness (if it happens i.e.). Possibly in our hearts we know that by spending on packaged coconut water, plastic soap boxes and branded scrubbers we are actually in a loss (in terms of costs vs added benefit) than we were using plain old coconut.

Entrepreneurial Opportunities

On the other side, it also leads me to believe possibility of entrepreneurial innovation would be highest at the  innovations bridging this divide. An apt example can be found in the story of "Idea on a leaky platter". Entrepreneurs can gain immensely from bridging this divide.

Bridging this divide helps increase measured GDP. Secondly the adoption of these innovation is much faster (it already exists!), therefore easier to monetise (that the only thing entrepreneur has to do!). It also leads to productivity gain as firm-based efficiencies come into play.

In Sum

Innovation at the divide between use value and sale value holds a lot of promise in terms of success for investors and entrepreneurs. It is this area we should be concentrating upon. What say?

Promoting Restaurants

Promoting Services is a really complicated exercise and particularly restaurant business is quite tough to operate in competitive market place. Anniversaries happen once a year, so do birthdays, dates happen across various locations, and that is why restaurateurs find it difficult to do promotions. To generate enough footfalls every day you have to have a really large clientele.
However, a reputation once created and regularly reinforced by sustained good experiences can act as a sustainable competitive advantage making a player successful in spite of the competition. A lot of new sets of ideas can be generated by focusing on the customer life cycle.

The customer Focused approach - attaching to the customer life-cycle
Touch points for various customers are different. As a person goes from age of college and dating (hopefully a lot of dates at the same place!), to jobs and marriage (and commitments along with it), the priorities change drastically. The expectations from a restaurant, as a result, changes. Some of the expectation changes could be mapped as below:
1. a hangout place
2. an exotic place for pampering your date,
3. a place where you get a meal fast during office lunchtime,
4. a place where you bring your clients to,
5. a place where you want to celebrate your anniversary,
6. place where you want to go after a movie (along with your wife)
7. a place to socialize to enhance your interpersonal relationships (for career growth)
Along these lines the strategy can evolve to attract people.

For example, as a hangout place, there may be designated days (Wednesdays / Thursdays nights, Saturday mornings, Sunday mornings - not Mondays/Tuesdays as you are not in the mood for hanging out then - No Friday/Saturday/Sunday nights as they are “primetime”). The menu should also reflect the change (out goes the wine and in comes the beer - 2 mugs against a cover charge - coffee and grub take preference over cuisine - music changes – layout changes lounge sofas come in – concentrated lights creating luminous circles on tables and dark spaces around them hiding the people - etc)

A Client Meeting place should involve telephonic reservation facility, customized menu card (with sponsor companies name and charge column left blank- chefs specialty included – can be made by any creative DTP person). As earlier the layout and arrangements should change – exotic wines – signature accessories – welcome boards at restaurant entrance (marking the guests name correctly) – company specific welcome drink branded in sponsor company name GE special banana milk shake (with a unique recipe of course not replicated on other menus - will work well with local businesses) - lights should be good enough for people to see each other clearly – small laptop stool should be made available along with notebooks and voice recorder if required. Client meetings should be available throughout weekdays.

Office time meal approach calls for pre-paid coupons – meal packages – meal cycle (set of varying menus that office goers can pick-up so that they do not get bored (same combo repeats once in two months), are well fed, meal is complete in terms of vitamins, calories, no-fat, fiber, carbohydrates, etc. Here too company sponsorship may be possible – company can sponsor dietician to customize the menu for their staff – this will be special menu – dietician has to work with restaurant menu as a superset of staff menu.

Finally a small note - care should be taken to keep tastes distinct, an ordered meal has to taste special and office-time meal has to taste homely. Restaurants are all about tastes – some in the mouth and some in the mind. Further, a lot of ideas can be developed by learning from the clubs of London of 18th and 19th century.

The new "Car"ma

Daimler-Chrysler recently launched the new Mercedes C and S class. The wonderful thing about it is the presence of a hard-disk on board. This sort of partly fulfils my prediction dated as far back as 1992! It was the time I just introduced to the microprocessor. I was fascinated by what it could do. I had ventured that this programmable piece of electronics was what was needed in the automobile! And along with the micro-processor, there was needed a hard-disk! It brings to one of my most favourite topic of electronics in automobiles. It also gives me confidence to un-veil some of the electronics usage in automobiles.

Pieces of the puzzle!

We observe a lot of developments in different technologies that could make an impact in this field:

1. Micro-processors are ubiquitous!
2. Memory is easily available.
3. Cellular infrastructure is in place! Also GPS systems are already being installed on vehicles.
4. Sensor technologies are well developed. We already have rain sensors, backing sensors, cameras on board, light sensors etc.
5. Short range information exchange technologies are available for example, RFID.
6. Display technologies are well developed, a case in point is the new Honda Civic!

Connecting the dots…Car as a gizmo!

To connect the dots we can look at the development of military hardware. We can hazard a few guesses.

We will see more customizable displays in dashboard. For example, the new speedometer is Civic could be customised into a tachometer! We can also expect the LCD screens on the rear passengers to read out the dashboard so that passengers can keep a check on the chauffer! It will also mean that the dashboard space can actually replace speedometer and other read-outs with camera images while backing up or parking.

Your car will be much more integrated with the manufacturer. The manufacturer can put-in a SIM card to transmit the operation data from the car back to factory test centre! In fact soon you could get a call from your manufacturer informing you that your radiator temperature is suboptimal and you need to bring in the car for repair / maintenance.

The revolution will actually happen when automobiles are integrated with traffic system. This will give a whole new meaning to traffic management systems. In fact we may even get some public announcements being relayed into the car speakers! There a possibility for vehicle to vehicle interaction as well. This will give the driver alerts on obstacles beyond the vehicle in the front giving precious seconds for response in case of accidents. Evolved safety systems depending on faster response, automatic collision avoidance etc. will make life easier and safer for passengers and pedestrians. We can very well look forward to “no overtaking” warnings and “vehicle closing-in” alerts.

We can expect vehicles to have access card system to grant access to various systems. If your card has information that you are an authorized driver for relevant vehicle type then the vehicle will work else it will not turn the ignition on.

In Sum

These developments are all a matter of time. Yet these gizmos are virus-prone. We noticed in Mumbai floods that cars with lot of electronics actually ended up worse-off than plain simple mechanical ones. Devices like power windows turned cars into death traps. So we need effective failure-proofing of these technologies before they get into our garages! All said we are looking into a fantastic future for gizmo lovers!

The New iPhone

In one of the most happening month for tech-crazy we had CES, Detroit Auto Show and MacWorld clamouring for attention. Amidst this innovation frenzy, Apple launched its new device, the iPhone. There is a lot to learn from the “history” Steve Jobs created at the MacWorld.
One set of learning is more about the technological aspect itself. While other, a more generic, is related to how good companies function. In both Apple showed remarkable insight, attention to detail and perseverance to do right things right.

A device to make history

I am deliberately calling it a device and not a phone. It has almost all the qualities of the device for the next digital revolution. And that it’s a phone is ancillary. To put in a full scale OS was a real clincher. This truly makes this device a platform device rather than a collection of camera, multi-media player, phone and contact-manager taped together. A platform device enables Apple to put in user’s hands a service pipe. Through this pipe Apple can supply unparalleled range of services. Apple has augmented pipe-features for this device featuring a carrier dependant pipe (EDGE) and a carrier-independent pipe (WiFi).

Intuitive Product Features

A lot of phones / multi-media devices currently function in two distinct areas, work or entertainment. However a person who works is the same one who needs to be entertained! I have never understood the reason for separate devices for each need. Apple however packs both features into their iPhone and even packs in two separate batteries for these functions.

Superior product design

Apple launched the iPhone with two memory variants 4GB and 8GB! That’s a lot of memory for a first product. Despite of this the weight of the product is quite manageable. This incorporates the learning from wide-screen Nokia phone and N‑Series. The initial demo of creating a wall-paper from a picture is also an example of smaller innovations packed into the iPhone design.

Better Interface

Apple equipped the iPhone with touch screen, no keypad! A very sensible idea indeed as most of the time PDAs are used as phones and do not need the full scale keypad. In fact when using the PDA as a phone the QWERTY keypad is a pain to use. If you have tried to use the small keys of Treo you will know what I mean. Using software innovatively, Apple has eliminated these disadvantages, giving us a QWERYT keypad when required. Further, the company who give us pointers highlighted using the ultimate pointer i.e. finger! I have no doubt Steve Jobs has made the screen smudge-proof.

Exceeding expectations

After a lot of anticipation of iPhone, when it finally came there was a fair chance that Apple might not deliver the hype really surrounding the product. Yet, Apple not only met but exceeded the user’s expectations from this product. Nothing new that’s something CFOs have to do regularly with Wall-Street analysts. But the key difference is that Apple shows this behaviour with customers! The Wall-Street analysts are automatically addressed.

Web augmenting customer communication

Being located in India, I was asleep when Steve Jobs was making history. So the first thing I did next morning was log onto Apple’s website. And there it was the iPhone page! Neatly displayed with all the details! Here is a company which knows that a lot of users will log in to their site on or after the MacWorld. Moreover here is a company that makes it “talks” to these visitors about its new products it is desperately trying to showcase. Try finding latest versions of Mustang.

In Sum

This was a perfect example of how a company should go about creating value! Give value to customers and demand value from them! This is precisely what management jargon “customer is king”, “customer first” etc. really mean. Compare this with Ford, GM and kin, which is addressing analysts rather than customers. The rest is mere detail!

Innovation inspired Services

We have seen that devices have actually evolved and are ready to serve as a launch‑pad for innovative services to takeoff. Creating innovative devices is costly. There are development costs, roll-out costs, (user) training costs and finally cost of changing user preferences. However, it is not difficult. It benefits from competitive race between device manufacturers. The nature of new devices soon becomes a standard expectation. Services, however, are a totally different ball game.

Current services
Currently services that are gaining acceptance are those that are based on the mobile phones’ ability to interface with computer (e.g. mobile phones as MP3 players) or mobile phone content being downloaded on the phone (e.g. movie ringtones, wall papers etc). This is in some way a parallel to what happened with computers.

Location-based Advertising Service through mobiles
We know that telecom providers have a database of subscribers with addresses. They also know where you are located based on the nearest tower your cell-phone connects to. Yet if I want to locate, let us say, a Petrol Pump then there is no service wherein I enter a keyword and the list of nearest Petrol pumps pops up. Now which network will people choose while roaming?
Let’s say if Airtel were to offer a service to owners of shops, hotels and other consumer establishments wherein they get themselves a business connection which will make their Airtel phone number searchable and accessible to people searching for it. Intuitively these people will pay a fee to get a connection with Airtel and pay a small yearly fee to get found!
Telecom service providers know this and hence will soon tie-up with Google, feed Google with the location details and Google will find you the list and keep the revenues too!
Let us twist this idea a little, if telecom equipment manufacturers can develop a small base station capable of covering a shopping mall and people within can be sent advertisements very specific to that location. Imagine you are shopping around 6pm and a restaurant close-by advertises a food-fest you might just be inclined to change your dinner plans.

Logistics – A device, network innovation
Have you noticed the range of devices logistics personnel carry to audit the schedules and delivery performance of delivery trucks? Now imagine a vehicle black‑box equivalent that can monitor all the vehicle details (speed, load, fuel) and send that across once it reaches the cell-phone coverage area through a cell connection embedded in it. Now do you think it will give GPS a run for money? I think so!
This can also help performance car manufacturers gather data from your car and keep car records for you. I can imagine myself receiving a call from garage telling me that my fuel efficiency seems to be dropping and I need to get a check-up! It can also call up authorities if there a crash which will be promptly relayed to the 911 / 100 number and the car garage as well.

A mobile Desktop calendar / Photoframe
Now imagine a company who wants to keep in touch with CEOs and key decision-makers regularly, every single working day. They give them desktop calendars to be on top of your mind. They sure are on top of your desk but it is not interactive. Now put a digital display with a calendar chip (these are very cheap) and a mobile device. This could be a desktop calendar or a photo frame and the message can be relayed through the SIM reaching the desktops of CEOs and decision-makers. Imagine they can change the picture on the frame by emailing to your-name-photo-frame@sponsor-company.com! They are now your partners aren’t they?

In Sum
Likewise, anything that has a battery and space can be fitted with a mobile SIM and innovations can be based around that.
Creating innovative services is not always costly, and roll-out is fairly simple. However, it has basic requirements that are not imbedded in most corporate DNAs. It needs a lot of innovation. Make that a hell lot more innovation! Add to it the very complicated “planned innovation”. Further complicate it by adding high failure rates. And the clincher, all this is easily replicable by competitors. This makes service providers lethargic to any innovation in services. So much so that telecom service providers have yet to come up with downloadable ringtones on fixed-wired phones. It will take one inspired service provider to zealously re-invent the boundaries of this space. In a nutshell, services innovation will not happen easily. What we have is a basis to dissect the possible innovation in services.

A Device for revolution

The search for next killer app is a product of two important components, the device and the service. However, real world economics drives each one independently though over a feedback loop. Consequently, we have mobile device manufacturers trying to add functionalities of popular services (like internet connectivity for email) and services are being designed taking into consideration the new devices (like m‑blogs).

I have mentioned about the components of device in my earlier post an year ago. Between that time and now we have significant developments along the lines of what I had written about. I am just going to summarize some of these developments.

Processors have gotten better

Mobile Processors are now a lot better with certain mobile devices now calling themselves computers, particularly Nokia N-Series Mobiles. These are not special processors but standard processors with stable OS with an ability to deal with text, different installable applications and their file types, streaming media etc. So now our mobile devices can identify different profiles of data like documents(Word, pdf, etc), html (xml) files, contact information files, text files, calendar entries, pictures, music files etc.

Devices have more memory
After a lot of development involving IPods and Mp3 players, we now have about 4GB of memory being stacked in a Sony Ericsson phone. The developments mini SD and micro SD cards, packing up to 2 GB in a micro SD, bring more good news.

Devices have better Human Interfaces
Human interaction with the devices has improved with touch screens, bigger screens, video conferencing cameras and full-function key boards being available on mobile phones. We also have mini USB to interface them with other devices.

Battery life is better
In spite of the famous Sony battery recall, we now have better and longer lasting batteries and devices that use power more efficiently. Put together we have more juice in our hand-held than few years back.

Network Interface
Devices are now ready to access the network in more efficient manner. Nokia phones now come with the capability of accessing 3G network and Wi-Fi networks.

Summary
All these developments have in fact set the stage for a string of developments. We should now see set of applications that can revolutionize the use of mobile devices in years to come. These applications will trigger a realization of importance of security identification that will influence further development of applications.

Next let us try and understand what killer applications can make our hand-held devices even more important to us.