Hunting the Celtic Tiger

I find the letter to FT by Rhodri Morgan (Freakishly low Irish corporation tax is damaging) a bit amusing. Essentially, he seems to be complaining that Wales, Scotland and host of other places lost out to Ireland because of their inability to compete with Ireland's low corporate taxes. He moves on to a discussion about tax havens and asserts that Ireland needs taxes to fund the bail out. What if the whole Europe goes for 12.5 percent, he argues.

One thing is for sure, it is not Ireland's interest or well-being that Mr. Morgan has in mind. Irish problems have resulted from a host of factors, and low corporate tax is certainly not one of them. If anything, FT's article in the same edition (Ireland's Low Corporate Tax Rate Vital to US Business) clearly shows how low corporate taxes have created over 100,000 jobs in Ireland, creating wealth in general. Moreover, if corporate tax was the only reason for choosing Ireland, there are a host of ultra-low tax destinations within Europe that have even lower tax-rates (like Liechtenstein).

Right from German surplus to French protectionism, there is no country in Europe that can possibly adopt a "holier than thou" stance with a straight face. This is not to say that Ireland does not have its problem, but it does seem that its European partners wish to take full advantage of the problem to further their own interests rather than to help the Irish.

Imagined Communities

Just finished reading “Imagined Communities” by Benedict Anderson, and I am seriously not impressed. The book is difficult to read and has a strong left bias.

I believe that all human beings have a strong need to belong. Add to this a primeval power dynamics and a probabilistic system, and we get some interesting results over time. Any form of organization, even the communist brotherhood, can be defined as stupid imagination of the mind. The rise of the concept of nation is indeed another invention to organize, control and belong. Disproving and scorning it will never be a problem. Nevertheless, the human beings would have to settle on an alternative form of governance that is stable if they have to either understand or leave this abstraction behind. And I seriously hope that the alternative form is not Communism, Marxism, Leninism, Stalinism, Maoism, Pol-potism or the like. The book could have been written in simpler words with lesser footnotes and could have traced the development of the concept of nation with lesser normative/value based judgements.

I seriously doubt the book’s usefulness for a business student, except perhaps to learn a trick or two about propaganda and make believe. Students of nationalism or history will, however, find it useful. My recommendation to an MBA would be to avoid it.

When Azure Meets Joomla, Facebook and Twitter

Two days ago I attended an event by SalesForce.com, CloudForce 2010. In the CRM world, SalesForce is an awesome company that has given companies like Siebel or SAP a real run for their money. I feel it is the best CRM around. Not content to occupy the CRM space only, SalesForce is now targeting cloud computing with a difference: it is trying to marry cloud computing with content management systems and rich-internet application (RIA) development to develop and popularize an alternative application development and deployment model. A very ambitious and daring venture, I must say. Even though the market is immature today, in the world of IT changes can be pretty fast. Or they can linger on (if not, we wouldn't find a single mainframe on the face of earth). A complex proposition at its best, I see many "goods" and "bads" to it.

On the up side, SalesForce has built a brilliant RIA and is trying to leverage its knowledge to both help and tie in its clients. It is doing a brilliant effort to make partnerships and sell the idea on the force of its network. The marketing strategy seems to be brilliantly thought out, and the execution is marvellous. The deployed applications are said to take lesser time, are on the cloud and readily deployable to browsers, iPad, iPhone, Android and BlackBerry. With lower costs, it can potentially be tempting for an entrepreneur to use the set up to launch an internet application. With "Chatter", they are also trying to be the secure facebook of the corporate world. With tools to analyse Twitter feeds and integrate it with SalesForce products AND the applications developed, the possibilities indeed seem mouth-watering. Having a functioning CRM RIA is a big plus here.

On the down side, I feel they are trying to do too many things and trying to be all things to all people. I am not sure how this hopscotch of ideas (as suggested by the title) would work out without some seriously tough strategy planning and implementation. There have been systems that have promised develop once and run anywhere in different ways, but have failed when they have not given enough flexibility to developers and designers. Content management systems like Joomla or Drupal come in handy on a typical LAMP set-up with a nice net based UI to develop a reasonably powerful and secure application that can run on any Windows or Linux based cloud. At any time a company can switch the cloud-operator or host themselves. With SalesForce, you are pretty much tied to them if you want the app. Joomla and Drupal, however, may not be compatible to build mobile device applications, and would still need you to maintain or upgrade your own code. Another worry I have is that they have tied-up with Adobe to deliver their application development IDE. In many of my earlier blogs on RIAs, I have often complained about the lack of end-user focus in Adobe RIA applications like the erstwhile Flex. I sincerely hope SalesForce does not depend on them only for this IDE.

In conclusion, the product definitely has an immense potential to succeed, but the path is far from easy and there are some problems that I can already envision. It will be interesting to see how the application develops eventually.

The Rise of PaaS

After Software as a Service (SaaS) we are now slowly entering the domain of Platform as a Service (PaaS). As the Internet speeds pickup and our hardware increasingly becomes more powerful, there is little to stop this transition. With enough competition in the domain it would possibly present benefits to a lot of people from a business point of view at both ends of the spectrum.

The possible apprehensions that a business may face while adopting PaaS include:

1. Security: Keeping proprietary code on alien servers may be hard to stomach for many businesses, with a constant fear about data-theft and data-loss. This is always going to be top-priority
2. Speed: Technically proficient companies may feel that they are ceding control of the speed of application as they would no longer control many things in the server, database and application development. For majority business owners, though, this may not be as big a consideration.
3. Portability: This would be another major issue. With their experience with computing over the last so many years, business owners in general would hate to tie down themselves with any PaaS provider. This means PaaS provider would have to either leverage some existing and popular framework or invent and popularize an entirely new one. Both challenges are not for the faint-hearted!

With respect to development of Rich Internet Applications, this would only further complicate the equation in this nascent field. Tie-ups, support, marketing and smart technical development is the way ahead, I guess. The big horses to watch include Red Hat, Microsoft, IBM, Oracle, Google, HP and SalesForce. I am sure many others would try as well. I feel that the dominant advantage would lie not primarily with better technology but with better marketing and reach as the product will increasingly get commoditized. Lets see.

Immigration and Difficult Choices

With reference to Tony Barber’s article, “European countries cannot have it both ways on immigration” in FT on September 4, I feel that Europe’s predicament about immigration is self-invented and will only get worse as time goes by.

In an earlier letter to FT I had advocated for a careful immigration policy for UK. I think the same holds true for Europe. Either Europe officially promulgates that it is not open to people who are different from them or they live with the spectre of "open" immigration. Unfortunately, it is perhaps cheaper in terms of wages to get the people who are "unlike" them. Split wide open by contradictory economic and social considerations, sitting on the sharp wedge of human rights declaration with the sword of a dwindling, ageing population hanging over its head, Europe indeed finds itself in a very uncomfortable position.

What I understand is that EU countries wish to maintain a healthy proportion of young, working, tax-paying population so as it is able to finance its generous (and I dare say populist) welfare policies. Immigration is the only viable alternative if fertility rates do not improve (even that would take time and would have to be actively supplemented by immigration). The other unpalatable choice may be cutting benefits wholesale, raising minimum working age, reducing wages, cutting pensions and raising productivity per person. I don’t think that any politician who cares about his career and understands even an iota of economics will even dare to say or implement this, or, for that matter, even people will not accept it. There would be strikes, riots and the like. So, Europe is pretty much stuck with immigration whether it likes it or not. Try as it may, its demographics will change, its social structure will change, its politics will change; as is already happening. Whether the change is for better or worse will depend on the countries and their ability in successfully integrating the immigrant population.

The Hedge Fund Manager and the Economy

Even though I have no problem with hedge-fund managers paying more taxes, I am not sure what it has to do with fixing the economy. Yes, to a socialist mindset the appeal may simply be the effect of “equalizing” it a bit more, but in practical terms I would say it is nowhere near top-priority. Politics can make a show of “fixing” the problem by finding a scapegoat and then getting back to business as usual, but will this solve the problem of an economy living precariously on the edge? Is this the best that the Government can do? Will we ever see more concrete policy changes instead of populist posturing which can think of nothing but CEO pays, Wall Street bonuses and “equalizing”? I wonder.

If CEOs are Accountable, so is Tony Blair

With reference to “The hatred of Blair is over the top” by Mr. Gideon Rachman in Financial Times (August 30, 2010), I would like to remind Mr. Rachman that CEO accountability is the norm of the day. The top-leader has to always take responsibility for the mistakes that are committed under his tenure, and the same holds true for Mr. Blair. Labelling it unfair makes no sense. Further, whether UK looks back at the wasteful extravaganza of Blair years, that set the stage for the financial meltdown, with nostalgia or disgust will depend a lot on the effectiveness of spin-doctors and the not-so-remote-possibility of a collective public amnesia. Barring this, the UK may not let off the hook so easily the leader under whose tenure such disastrous policies were implemented and the country went to a meaningless war. And it is no different than holding the CEO responsible for disastrous company policies.

Looking to History for Roots of Management

I have just finished reading three books: "Concept of Corporation" and "The Practice of Management" by Peter Drucker and "My Years With General Motors" by Alfred P. Sloan. I read these books to understand how management as a subject was born and what is management all about actually.

History, I have always believed, has the roots of what we see today and lessons about what to avoid. The central theme that I have picked from these three books is that optimum decentralization with a strong core is the secret of managing growth. Not only it makes managing easier, but also it helps to test and evaluate managers without endangering the whole enterprise. An enterprise that cannot generate its own leaders is bound to run into trouble sooner or later. To generate leaders and retain good people, the company's course of action and its expectations from its people needs to be transparent. This brings us to what Mr. Drucker calls managing by objectives, that everybody in the organization has clearly defined goals and is able to track his progress objectively. The next challenge is aligning the interest of the individual to that of company by helping each person to see the whole rather than one, small, obscure part. Giving people more responsibility and meaningful tasks are the suggested remedies.

The concepts, as simple as they may seem, offer a powerful perspective supported by recent books like "Good to Great" and "In Search of Excellence". This makes me feel that there do exist some basic, common-sense tenets or principles that remain unchanged over time, but still need some experience and wisdom to apply correctly. Perhaps this will keep the management an art known by many and perfected by few.

Globalization and Its Discontents

Just finished reading "Globalization and its Discontents" by Joseph Stiglitz. One thing is for sure: you will never read any news about IMF, bailouts, austerity packages and other related things in the same way as before after reading this book. Whether you are a die-hard capitalist or communist, you will find something to love or hate in this book. The book does not mince words to squarely lay blame at IMF's door for some of the biggest economic declines in the last 30 years or so, including Russia, East Asia and Latin America. Even if you do not have a very good idea about Macroeconomics, quite a few things would make sense. And if you do, this book would give you a lot of things to think about and chew on. Very nicely written book. Nevertheless, even though I recommend reading this book, there are some things in the book which I understand but don't agree with in terms of its feasibility in the real world.

Goodness and fairness are good to have. Unfortunately, goodness and fairness can permeate only from the strong. And nobody can teach that to the unwilling strong or moral-lecture the strong into being good. Such is the nature of power. And, as much as one may not like it, the world operates on principles of power and self-interest, which in turn derive their strength from how we are brought up. The question of making the world a better place is not simply the question of having the right policy: it is always possible to game a system. The question is about the basic human learning and understanding. If the values of humanity and universal brotherhood are not imbibed at an early stage, it is virtually impossible to get it later in life. The definitions of right and wrong, acceptable and unacceptable vary so wildly that it is nigh impossible to reach any kind of common standards. Further, it is fiendishly easy to use, abuse and mislead an economically deprived crowd. So, it is in the interest of most political leaders to keep things that way. There are simply too powerful vested interests that do not understand the meaning of fair or good. For them might is right, and so the world moves on. This problem will not be solved with intellectual discussions.

The book also comes down to some veiled rich-bashing, blaming the rich for all ills, and poor are generally exonerated by virtue of their suffering or their mistakes are generally toned down. Nobody forces anybody to take a loan. To live within one's means and getting the house in order is one's own responsibility. Fairness is good to preach, but as far as the eyes of history go, it has never-ever been successful. Is it desirable? Definitely. Is it possible? No. Yes, we can try. But it is good to know the odds you face. It may be good to build consensus and avoid hubris, but avoiding hubris and working with a committee are two different things. Making the collective wiser than the individual is a skill that very few have.

Overall, I find the book's position centrist, leaning a little towards left. The writer is also either naive or idealistic to assume that the world should operate on principles of fairness on its own account. The truth remains that in this world powerful rule over the weak. As somebody said, the meek shall inherit the earth but not the mineral rights! The writer is right to point out the imbalances and unfairness, but his approach is solve the problem is somewhat idealistic.

Who Can Overhaul China?

I find Arvind Subramanian's article "India’s weak state will not overhaul China" (August 16, 2010) pretty amusing. It seems that the writer is not happy with India's 8.5% growth as he is not able to truly explain it within the framework of his understanding.

It is true that India is not progressing as fast as China. But then who is? Nevertheless, it is the second fastest growing economy and the fastest growing democratic nation. It is one of the few countries that can make supercomputers, lauch satellites, and build nuclear reactors. It has some truly international corporations and a vibrant capital market. As far as market friendliness is concerned, I would recommend the writer to read Joseph Stiglitz's "Globalization and its Discontent" so as he gets a more balanced view about the "benefits" of textbook liberalization that destroyed economies of Russia, Czech Republic and Argentina, to name a few. India is perfectly justified in taking it nice and easy. Post 1990 it has been wise to avoid the mistakes of star IMF pupils, and the results speak for themselves.

India is a relatively young nation and has its shares of problems, including corruption, terrorism, naxalites and poverty, to name a few. However, to term a nation with the third largest standing army weak smacks of intellectual arrogance. Perhaps India will not overhaul China. But in its current form I doubt if any nation, including US or UK, is capable of overhauling China. What is that supposed to mean?

Co-evolution of Firms

Was thinking of "Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions" by Johann Peter Murmann again.

I was thinking of what makes the approach of the writer different. That environment affects business is increasingly understood. In strategic planning, SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis uses frameworks like PESTEL (Political, Economic, Social, Technological, Environmental and Legal) factors to evaluate impact of external environment on a firm. Then what is new in co-evolution? Co-evolution attempts to show that as external forces affect a firm, the vice-versa is true as well. Moreover, all the players in the game affect each other. I like it as I feel that it is something very close to what I believe about the world in general (Masterplan and Gaming the World). I think a good understanding of probability and vectors (Mathematics) along with relativity (Physics) would help to model the proposed economic theory. Due to the inherent complexity, it will also acquire an intellectual and philosophical dimension. The theory will also help to dispense away with the idea of a corporation as a helpless victim or lucky benefactor of its environment. Lobby groups are a hard-truth, and the level of their success can have a positive or negative impact on the industry's growth or decline. This does not do away with firm specific advantages (management, marketing, R&D), but adds additional influencing factors and uses the paradigm of co-evolution to explain how an entrepreneurial culture and a pro-active corporate organisation (that is all companies in the industry finding a platform to work collectively and affect the external environment) play an important role. A good example is that the failure rate of dye firms was similar in UK, US and Germany: around 75% of the dyes failed. However, in Germany the number of dye firms that tried starting a business was significantly higher than either UK or US. It, hence, had more successful and unsuccessful dye firms than them. This higher level of trials, experimentation and growth was facilitated by the education system and the legal framework. In turn, a stronger dye industry fostered and lobbied successfully for better educational institutions and favourable legal framework, hence creating a virtuous circle. The opposite was true for US and UK: other industries were more powerful in these countries and dye firms were simply sidelined.

Concluding, I love business history books as they present rich, factual data about real-events. Very much a case study. This book does not disappoint on this front. Additionally, it collates the events in a pretty practical and useful fashion. I agree that co-evolution in business context needs more research and that it has the potential to become a powerful theory. On the other hand, it also points to the fact that common sense, love for work and long-term perspective on events is very important. It also reaffirms that basic principles espoused in "Good to Great" and "In Search for Excellence" are pretty much accurate. A nice book overall.

The Difficulty of Being Good

Just finished reading another awesome book by Gurcharan Das, "The Difficulty of Being Good : On the Subtle Art of Dharma". A gripping book about ethics, politics and goodness. The writer draws examples from both West and East, referring to philosophies from ancient Greece, Renaissance, Buddhism, ancient Hinduism and Modern philosophers to wrestle with the idea of goodness in day-to-day life. The book draws the base examples from Mahabharata, the ancient Indian epic narrating the story of the great feud between cousins that marked the end of the third age of man. The story is complex, rich and meaningful in equal measures, but I doubt it if anyone without an interest or roots in India will be able to enjoy it fully. For any intellectual Indian with a strong interest in Hindu mythology and philosophy, this book is a treat.

The book advocates reciprocal altruism instead of either pacifism or real-politic solutions. In this it addresses some fundamental questions surrounding sticking to the merits and demerits of available choices and problems: way of righteousness, way of deceit, way of duty, the need to be recognized, the power of the feeling of vengeance, importance of mentors, role of a ruler and role of merit, among other things. It is rich, intellectual gymnastics that will help you to gain a fresh perspective about life and living without compromising integrity.

Thinking About PE and Entrepreneurs

Private Equity also needs a host of tools to gather and analyse Business Intelligence. These include public records searches, news archives, legal proceedings, patent awards & applications and employees. It seems that PE Governance relies strongly on elaborate processes and ruthlessness. The discipline imposed by debt means that they are pretty conservative in their attitude. It also means that it can be extremely difficult for an entrepreneur working with a PE firm to find breathing space. PE firms simply have too much money on stake and hence need strong internal controls, auditing and monitoring. An entrepreneur, on the other hand, lives to be free. PE firms provide an effective alternative to governance by boards. Nevertheless, it may prove to be more effective for mature firms rather than start-ups. Moreover, since PE firms must focus on returns, I wonder what stops them from milking a company dry in 10 years and leave the rotting corpse for anyone who wants it. I am, therefore, a bit sceptical about PE model being the best one, especially for start-ups. Or perhaps I am missing details about operations of firms that specialize in start-ups. Either way, there is much to learn.

Knowledge and Competitive Advantage: The Fibre of Success

While explaining the development of the industry, the writer attributes the success of German dye firms to their access to quality knowledge centres in organic chemistry and their strong marketing structure. With very little patent protection in the hey-days of German dye industry, the German firms had to face very fierce competition and always strive to find cheaper ways to produce the goods. Like any commodity or consumer product based industry, they had to develop a strong marketing organisation to differentiate themselves from the competition. It is said that what does not kill you makes you stronger. Nothing could be more true about the firms like Bayer and Hoechst that survived this cut-throat environment. The marketing efforts involved activities like localizing packaging graphics, making efforts to educate customers in order to foster customer retention and kickbacks. Even though the writer praises the marketing efforts of Germans, it is noteworthy that such generalist statement are simply not true. As we have read about Deutsche Bank, many famous German institutions made horrendous mistakes with their marketing tactics while most British alcoholic beverages companies did an excellent job of the same. Building on what the writer states and my understanding, I would say that it really depends on a particular organisation, the state of the industry it operates in (both nationally and internationally) and the knowledge centres available to it (depending on the national institutions and culture). National cultures and institutions can combine to give the industry specific advantages and disadvantages, but to predict how they will do so is anybody's guess and it is only with the benefit of hindsight that one is able to attempt to put a structure around it.

As national institutions affected the growth of dye industry, the vice-versa was also true. Dye industry leaders in Germany rallied effectively for the most part to promote education in organic chemistry, creating a virtuous circle. The business-academia-government partnership promoted education. The business leaders also played an important role in the growth of the company. For example, strong entrepreneurial leadership and willingness to bring in professional managers helped Bayer to become a powerhouse. The development also explains the dynamics of first-mover advantage, the mechanics of exploration in a new industry and the institutionalisation of R&D for technology based industries. The writer asserts (and I agree) that chance does indeed favour the prepared mind. The first-mover advantage is a fact, but political changes, wars and complacency are facts as well. The only truth is that one has to keep eyes and ears open without fail, look towards the future with an entrepreneurial spirit, respect and remember history without carrying its burdens and yet remembering its lessons, ethically promote institutions and lobbies that are good for the business and to be able to nurture and reward talent. To cut it short, it was never easy and never will be. But it was always fun and will always be!

Knowledge and Competitive Advantage: Development of Knowledge Centres

This book specifically focuses on three countries: UK, US and Germany. In order to make the user understand the context of observations, the writer explains the attitude towards education in these three countries and its corresponding effect on the dyes industry. But what were these attitudes?

In UK, where the first industrial revolution was led by inventors and tinkerers with no special education background, education on the whole was ignored in favour of practical experience. Except the centres of excellence at Oxford and Cambridge, not much attention was paid to education. This was especially true for synthetic organic chemistry, a crucial component for the development of the dyes industry. Even though London was plush with imperial capital, it found itself lagging behind Germany and US in this sector.

The US spent heavily on education, but with a very pragmatic outlook. Generally, only if research could prove directly and immediately beneficial was it encouraged. Engineering, management and other practical disciplines got a major boost and in turn contributed to the growth of US as an industrial superpower. US, however, largely ignored research for research's sake and consequently lagged behind in organic chemistry. Nevertheless, it researched production of base chemicals and its firms producing base chemicals were fairly competitive in the global arena.

Germany made research and knowledge the backbone of its industrial setup. Its strong knowledge economy and commitment to research helped it to produce figures like Hoffmann and Kekule in the field of organic chemistry. This, along with the fortuitous timing of the German patent law, helped Germans to dominate the global pharmaceuticals and synthetic dyes industries. Overall, students who wanted to study organic chemistry needed to know German and many travelled to Germany to obtain PhD in organic chemistry.

Knowledge and Competitive Advantage: Of Evolution and Dyes

I have started reading "Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions" by Johann Peter Murmann. My first impressions are of intelligence and almost a child-like enthusiasm in the writer. He tries to "woo" all audience, trying his best to be agreeable (the way he tries to explicitly and elaborately tries to disassociate himself with biological aspects of coevolution is a case in point). Another aspect of worry is that the writer evaluates the growth of industry only till 1914, the eve of WWI. This would give a distorted picture of evolution as it squarely ignores an important aspect: political risk. Sometimes the national institutions that are responsible for a country's rise also contribute to its downfall. This important dynamics of power is squarely ignored. There is a difference between achieving progress and in sustaining the progress, I feel. Nevertheless, the book may prove valuable in understanding the basics of coevolution theory and enable the reader to develop a different way of viewing industrial progress. The book also promises to shed some light on the development of patent laws and their application in UK, US and Germany. The writer also intends to study the subject post WW1 in some future book.

The first thing that I gathered is the concept of "initiator" and "replicator" used to define a coevoluting system. Initiator is the actor that actually interacts with the environment (the manager, employees etc.) and the replicator is a unit that is being replicated in the environment, is responsible for affecting the actors and plays a crucial role in survival (genes, company culture). I also came to know why purple is considered a royal color: before synthetic dyes the color was from a natural dye called Tyrian Purple. This was very expensive and hence only the rich and the royalty could afford it. Hence the association of purple with royalty. The writer goes on to explain the major technical innovations and changes that led to the growth of the synthetic dye industry, and the way this led to the gradual extinction of the natural dye industry. It also explains how and why R&D laboratories came to dominate the industry and lone inventors were not as effective on their own: it is one thing to invent something and another thing to be able to get commercial value out of it. It required not only the traditional investment in marketing and distribution but also persistent effort to make the production process cheaper, reliable and mechanized. This translated into huge costs that could not be afforded by a single individual. This reinforces the observation that capital-intensive industries with small product life-cycles are best served by big companies run by professional managers.

Striking Down the Economy

Does union action stand for a fight against exploitation and injustice? I would definitely not say so about the planned 20 day strike action by Unite, the British Airways union. Driven by an impeccable, self-righteous sense of entitlement, Unite seems to be in a relentless, suicidal pursuit of destroying economic value. It seems that it is taking a sadistic pleasure in killing the very source of its own bread and butter without taking into account the current economic scenario.

The boding is not very good as heaven only knows what mayhem will be unleashed once the new Government tries to put in austerity measures. it doesn't look like that UK is game for the impending hard times, and unions would lead this charge of self-immolation. I wonder what lies ahead.

The PE Governance Model and its Implications

PE promises a new governance model that is more ruthless, hard-nosed and realistic when compared to traditional governance models (family-owned, professional managers controlled by a Board of Directors - public or private). Although I have to take it with a pinch of salt as I believe that too much pressure can destroy team fabric, there is some truth to what is being said here.

PE firms are anything if not efficient. The pressure brought on by debt forces them to a discipline not seen in other private or public firms as it forces them to monitor their dealings closely. In absence of the sword of debt hanging on their heads, as will be the case with PE firms going public, it will be interesting to see if the PE model holds. Further, ignoring the human element of business can be a dangerous mistake, especially because humans can vote in elections and can influence. Hence, I am not surprised why PE firms seem to be the favourite punching bag in the current financial crisis. Step on a few feet, make some enemies and wait for them to get even. Personally, I think it is an excellent model capable of delivering value due to its meritocratic and impersonal approach. But it is likely to make them more enemies, something that may be responsible for that talks about PE firms being punished for a crime they never did. PE firms need a strategy to re-package (but not change) their governance style, I say.

Legal Obligations for PE and its Implications

Merger and Acquisition activities are bread and butter to Private Equity, and M&A activities are directly affected by Antitrust Regulations in the US. Hence, PE firms need to be aware about them. This is what I learned about the main Antitrust regulations in USA:

The Sherman Antitrust Act of 1890 prevents companies from horizontal/vertical price fixing, boycotts, bid rigging or forming cartels/market allocation. This focussed on limiting monopolies. It, however, did not outlaw any attempts to reduce competition. This was addressed by Clayton Antitrust Act of 1914 that further prevents interlocking directorates, price discrimination, acquisitions with the view to reduce competition and tie-in sales agreements (unless needed to maintain selling company's goodwill). The Federal Trade Commission Act (FTC) of 1914 further prohibits using market share to strong-arm the suppliers and using misleading/false advertisements. Robinson-Patman Act of 1936 was brought in to "save" small retailers from chain stores by prohibiting price-discrimination that is not cost justified or that is not done in response to a competitor's price- an odd-man (according to me) that stands out for its populist undertone. An anti-merger loophole in the Clayton Antitrust Act was closed by the Celler-Kefauver Act of 1950, which prevented acquisition/merger by buying of assets (earlier act outlawed acquisition by buying of stocks only). Hart-Scot-Rodino Antitrust Improvement Act of 1976 further tightened the regulation by making it mandatory for companies to go through at least a 30-days waiting notice period for a merger or acquisition. In principal, this allows the authorities to investigate the case thoroughly, ask for more information and decide if it violates the anti-trust laws.

Overall, the Antitrust laws in US seem robust and well developed. These laws are further supplemented by a long and inclusive list of more than 40 laws to protect consumer rights, indicating a well developed consumer protection system as well. PE firms need to take them into account, depending on the industry vertical they are operating in. In addition to Antitrust laws, PE firms are also affected by laws governing the Capital Markets. This includes 8 different acts, including the recent Sarbanes-Oxley Act of 2002. It seems the PE firms rely on the exceptions stated in the laws governing the Capital Markets to prevent or reduce the overhead associated with it: offering the securities to a limited number of accredited investors (499) with a pre-existing relationship with the firm. All the same, the bottom line that I gather is that private equity functions can get impossibly out of hand in the law-maze without the presence of an able lawyer in the team. After reading "World's Newest Profession" by Dr. McKenna, I also gather that Management Consultants may to be involved to keep clear of legal issues. I am not sure about this as PE firms have their elaborate processes to impose internal control and check fraud, which if sufficiently developed or recognized may obviate such a need. No matter which way it turns, it makes my head reel to think of the amount of bureaucracy and paper-pushing inherent to businesses at larger scale.

Re-discovering a Ghost

Just finished reading "A Ghost's Memoir: The Making of Alfred P. Sloan's 'My Years with General Motors' " by John McDonald. It is a small book of 187 pages, and I found it so interesting that I finished it in barely 2 days. That is what can happen to reading speed when a book is good. Perhaps in terms of pure business education this book may not have as much to offer in absolute terms, but in terms of realism, strategy, organizational behaviour and group dynamics, the book offers some remarkably deep insights. It is an ode to a person without whose effort the world would not have seen one of the best books in business studies. The book does not reflect well on Peter Drucker, whose introduction to the revised edition of Sloan's book appears both delusional and ridiculous in light of the facts presented in McDonald's book.

I cannot help but observe one thing: a strategist needs to remain unobserved and even under-estimated while being very alert and perceptive, making the right moves at the right time to be silently influential. This, however, can translate into a genius dying unheard and unsung in his time. Only in the long-term and only if somebody is willing to dig enough does the genius appear. A strategist needs somebody who can handle his PR and marketing without jeopardizing the strategist's position of power or influence. A tricky bit but is perhaps necessary. Like Mr. McDonald became a channel to show the world the genius that was Mr. Sloan, sadly nobody was able to play that role for Mr. McDonald. In fact, had it not been for Mr. Drucker's inaccurate foreword, his story would never have been told. We also learn of the importance of the discipline of business historians and their corresponding role as Ghost Writers in bringing out an accurate description of the history of successful enterprises.

The book brings out the importance of chance, networking, strategy and perseverance in any kind of conflict. Luck plays its part, but fortune does favour the brave and the persistent most of the times. It is important to start over with a basis to fight on, without which the fight may prove to be unsustainable. As McDonald discovered that he could bring up a case against GM for suppression of the book and found lawyer friends willing to fight it out, he persisted with it and played his cards right. He never took what was told on its face-value and tried to place it in larger scheme of things. Overall, it is a good example of group dynamics in hostile situations and I would recommend the book to anybody who has read and enjoyed the original book by Mr. Sloan.

Global Brands: Conclusion

Due to growing concerns about alcoholism, effect of alcohol on health and other social concerns, alcoholic beverages companies were further under constant pressure to diversify. Internationalization was a key component of this strategy and so was diversification and acquiring complementary brands. This applied to beers, spirits and wines. The companies, generally, found it easier to diversify into sectors where they could draw upon some common manufacturing, marketing or distribution knowledge. Only the companies who were able to develop a coherent strategy, worked on building marketing knowledge, expanded internationally and diversified appropriately were able to survive. Others were either liquidated or acquired by other companies in the long term. The spirit producers were the first to diversify due to possibility of controlling the production process and relative ease of transportation, followed by beer brewers (discovery of the process of pasteurization of beer helped). Wine producers were the last to diversify due to inherent difficulty in maintaining a consistent quality of the wine from year-to-year.

The book mentions four waves of consolidations since 1960, with British companies leading the pack. In first two phases consolidation took place at a national scale in form of mergers and acquisitions. Phase three saw the birth of global alcoholic beverages firms as we know them today. Firms no only merged across borders with each other, there was also a lot of vertical integration and diversification. Some M&A activities came under the scanner of anti-trust enquiries and blockades for the first time. The last phase has seen rationalization and assimilation of resources and the emergence of trading of brands like a piece of intellectual property. Given the high cost of developing a brand from the scratch, brands in this industry tend to outlive the founders and even the company. Very few new brands are able to make a global mark, and need a sustained & well-thought branding strategy.

Another thing that I have learned is the basic ways in which a company can attempt to break into an international market: e-commerce, merchant houses, agents, distributors, an employee working in the new country, wholly owned distribution channels, partnerships, M&A and starting a new business on their own. The choice depends on the industry in question, desired control on marketing and distribution, the ease with which the company may want to come out of the market, risk appetite and the desired level of expenditure. Overall, the book helped me to take a fresh perspective on consumer goods industry and the strengths (and weaknesses) of a family owned enterprise compared to a firm run by professional managers. I also came to appreciate the role of branding and the marketing knowledge gained over time in the life of a company. Another interesting Business History book over, time to move on to the next one!

Global Brands: Importance of Branding for Consumer Goods

That reach is king is well-known and affects technical and non-technical businesses alike, albeit in different but very crucial ways. For a purely technology business, being accessible and customer friendly may take precedence over perceived quality or benefits, i.e. a client is more likely to invest in systems and technologies that promise to be reliable and are easily maintainable, even if they are not as efficient as other "transient" alternatives. Efficiency and quality is good to have, but mean little in the absence of a strong support structure of distribution and maintenance. Brand management, then, becomes a function of this image: branding is both functional and perceived in almost equal measure.

For consumer goods, on the other hand, brand management is a different ball-game. Due to lack of concrete differentiating factors in general and lesser protection in terms of patents, perceived benefits may take precedence over functional ones. In fact, as the author asserts, food and drinks sector is the most "brand managed" and can have very tight margins. This is highly applicable to the Alcoholic Beverages industry as product life-cycles are larger and differentiating factors fewer. Players in this industry try to ensure survival by clubbing both Marketing knowledge and distribution networks. It is common to find consolidation and cooperation even with rival firms to build a economical and reliable distribution channel. This has been brought out very nicely in this book.

Global Brands: Introduction

Currently I am reading "Global Brands: The Evolution of Multinationals in Alcoholic Beverages" by Teresa da Silva Lopes. As the name suggests, this book focuses on the development of MNCs in Alcoholic Beverages from 1960 to about 2003. Here, it focuses on an industry that has been traditionally dominated by family-owned businesses and relies heavily on marketing: managing brands and distribution channels more specifically.

Why does purely professional management that seems to outshine family-dominated businesses in other industries lag behind here? The author believes that this happens because there is a strong element of heritage and pride in this business, which makes it more than just a "money-spinner" for the family. This ensures that the family tries to take decisions keeping in mind the long-term consequences. For this, they are prepared to bring in professional managers but maintain a controlling stake in the company. Managers, on the other hand, may focus on short-term results to demonstrate performance. While this may work very well for industries with a small product lifecycle (like technology), it is not as effective for the Alcoholic Beverage industry where brands sometimes outlive the company. The business is also marketing-intensive and needs sustained brand management, perhaps more than any other product from the food and drinks industry. The book explores the critical role of effective and consistent distribution channels along with the optimum use and nurturing of the Marketing knowledge. I am impressed with the effort put in to produce this exhaustive research. Overall, as a data repository it is an excellent source to get a bird's eye view of the alcoholic beverages industry and in the process learn some important bits about consumer goods based businesses.

Of Lehmans and Goldmans

Mr Dick Fuld is unrepentant and will portray Lehman Brothers as a "victim" of the crisis. He claims that if other banks were denied the government support, they would have collapsed like Lehman Brothers. Further, he asserts that Lehman was justified in using Repo-105 as it is legal and the regulators knew about it.

Where do I even begin... The defence given by Mr. Fuld is alarming as it implicates the government, the regulators and the big banks in a scam of unprecedented levels. His argument is simple, let the one who has not sinned cast the first stone at Lehman. In other words, Mr. Kettle please don't call Mr. Pot black. It just turns my stomach to think about how deep the rot runs. So deep that it gives somebody the audacity to defend a wrongdoing because it was done with the permission of the authorities, or at least by keeping them in the loop. This is going to prove mighty embarrassing for SEC. Taking down Lehman and then going after Goldman Sachs will not help the cause of economy but will perhaps help the governmental bodies to escape blame. Allowing a misdemeanour and then punishing it; I think relevant SEC officials should be tried for criminal negligence. But, like that's going to happen any time soon. Authority without responsibility or accountability seems to be the defining factor of government bodies around the globe. How many government employees have you heard of who got fired due to lack of performance?

The final word is that big thieves hang the small thieves. So goes the law of jungle. I increasingly feel that it is useless to expect any concrete justice because that would mean prosecuting too many powerful people together. The government is simply in a hurry to find a scapegoat and then continue with its disastrous business as usual. In fact the cancer has been allowed to go so deep that it is difficult to even talk about from where to begin a possible reform. I guess that in God we trust, but the Devil is a good business partner as well. Amen.

Global Electrification: Conclusion

As electricity started playing a critical role in industrial, military and civilian life, it came to be viewed as an indispensable strategic resource. This, combined with rise of nationalism and intensive capital requirements of the industry, led to the "domestication" of electric utilities and hampered the development of international electric grids. American and Foreign Power, which had come to dominate the electric utility scenario post WW1, lost sizable assets in Latin America and Cuba. Post WW2 big names like Sofina became investment houses. This decline continued well till end of 70s, when barely 1% of the world's electric generation was in private hands. The big Belgian, American and Canadian names lost their considerable clout. Post 70s, the world has witnessed a trend back towards globalization and private ownership. The trend has accelerated considerably after the collapse of erstwhile USSR and the end of cold war. The multi-national organizations entered the arena again, with separation between generation and distribution becoming sharper, and their presence over multiple countries and complex cross-shareholding patterns have re-emerged. It seems that for now the balance has once again tilted towards globalization, a long time after the first great war. For how long it will stay this way is something to look out for.

This book demonstrates the effective use of holding company structure for entrepreneurial activity in capital intensive sectors. It also brings out the political risks inherent to capital-intensive sectors that grow on to become strategically indispensable. The critical role of international finance in the growth of such sectors is also explained nicely. In my view, in the current age a lot of lessons from the book may be applicable to the telecommunications industry. All in all, an excellent book that will give you a good understanding about the development of global enterprises in the last century despite of political risks, set-backs and uncertainty.

My VICTOR Framework

How does one get the best performance out of the team? This is a fundamental question with no definite answers, a question to which considerable academic research and books have been dedicated. For the uninitiated it can be like the search for an ever elusive fountain of youth. My thoughts on it out of my experience. I believe keeping an eye on the following is necessary to maintain a top level of performance (my VICTOR framework!):

1. Vision: What does your company stand for? If your company has no concrete vision, what do you think your group stands for? If you can articulate it in few words and communicate it effectively to your team, and then go on to implement it in every aspect of your functioning; you will be able to build a strong team. Your hiring needs to be careful and needs to carefully consider the culture of the company.
2. Individualization: You have to remember that what motivates and drives you does not necessarily drive everybody. Spend time with your team, get to know how people fit and what they can do best. Focus on strengths and put people in the right place instead of picking on their weaknesses.
3. Consistency: Whatever you do, you will have to be consistent with it. Random changes (changes that appear random to your team) can confuse and demoralize.
4. Transformation: If you talk, walk the talk. Make real changes, put systems on the ground and take people into confidence. Else you will loose credibility sooner than later.
5. Output: Put in place ways to measure the output,without which there is no way to credibly measure the success of the changes.
6. Reward: Encourage positive behaviour by rewarding it. Take the career of each member of your team member seriously and let them know that what kind of growth path you have in mind for them

I will expand on this more in my future blogs. I will end with saying that any development methodology and any process can do only so much. Without the passion of the leader, consistent top-level performance is only a pipe-dream. If you cannot nurture talent, the talent will leave you. Especially in sectors like IT, where the demand is much higher than the supply, understanding and nurturing your team is of paramount importance.

Importance of CRM

When your wife is a Marketing Manager, there are always some interesting bits to learn. Often we discuss office situations and see what we can learn from it. In one such recent discussions, I realized how important a CRM system is to a company. Even before talking to her I had envisioned of something similar for my company (when I start it), but talking to her not only helped me to get the "technically" right words for my ideas but to also see the practical implications of the same with a real-life case study.

There are two critical functions that can be made hell lot of easier by automated CRM systems like Salesforce: tracking Sales and measuring Marketing.

Keeping track of the sales data can be a herculean task. If a CRM system has not been incorporated right from the start, the sales executives and managers may get really insecure about sharing their contact lists one fine day. Implementing CRM retrospectively can antagonize people and needs a major internal marketing initiative, after all you will be selling to a sales guy! The sales team needs to understand that their confidentiality will be respected and the CRM system will help them to track and serve the clients in a much more effective fashion. If they are not convinced about this, there is little chance that the organization will be able to benefit from the CRM implementation. Hence, get it in as soon as possible and keep it. Sales professional may feel that such systems would make them "dispensable" by making hand-overs easier and by ensuring that the company does not have to worry too much about a huge portion of sales disappearing with a sales executive. They need to be reminded that sales is, anyway, a strongly personality based activity. Hence dependence on the executives cannot disappear and they will always be invaluable. The CRM would, however, discourage any kind of rent-seeking or unethical behaviour and make Sales more robust. Ultimately, it is good for the company and would make Sales more effective.

Measuring Marketing is increasingly seen as a way to rationalize marketing costs and get "greatest bang for the buck". Many organizations, especially the small and medium sized, tend to see Marketing as a cost and a luxury. Then there are professionals who exactly do that: talk and not back it up with data. This can lead to politically very uncomfortable situations for Marketing and it may struggle to explain the necessity of its existence. No wonder in down times it is one of the first to face the axe. Let us try to understand this with an example. Lets say that the Marketing Department of a company A organises a series of seminars that help the Sales to get an average of three new customers per seminar. The CRM would enable to easily track the sales generated by these leads. This would not only help Marketing to understand the success of the event in terms of ROI but to also tailor future events to be more cost-effective. Additionally, it would provide the necessary political cover to advocate the existence and growth of the department.

Concluding, if I am made in-charge of a Sales and Marketing Department, I wouldn't even touch it with a six-foot long pole if it does not have a proper CRM system in place. In fact, it will be my biggest priority to get such a system up and running before I try to implement anything.

Global Electrification: The Proliferation of Electricity

Electrification initially followed settlements around railroads, energy intensive industries (like nitrogenous fertilizers, electroplating, smelters), mining operation, plantations besides in capitals, large cities and port cities. By 1939, however, it had become a part of the "modern" living and critical for industrial progress. In fact, the writers wonder if the reason behind the downward spiral of a once prosperous Argentina was related to its lack of electrification. The growth of this capital-intensive industry started with the invention of arc light, electric bulb, electric motor and electricity generator. It is notable that Edison, commonly thought of as the inventor of the electric bulb, was not the inventor of the electric bulb: the concept had been demonstrated and used by others before him. What he did invent was the use of high resistance filaments like tungsten (instead of carbon) to enable having electric bulbs connected in parallel instead of in series. This enabled the birth of first electric utility and enabled proliferation of electricity supply as a business. Initially, both AC and DC current were produced. The invention of transformers, transmission lines, DC adapters and AC motors tilted the balance towards AC power.

Electricity generation, I understand, is capital intensive. Nevertheless, it appears to be a deceptively one time investment. The engineering, financial and management experience required to run a widespread electric utility is considerable. I came across, what is referred to as, "a holding company" structure that was used to mobilize the gargantuan resources needed for such ventures. Such holding companies comprised of respectable names in the domain (to inspire trust for investments) and typically domiciled themselves in business centres that had deep capital markets and were tax friendly. The most popular destinations before WW1 were UK, Canada, Switzerland and Belgium. Additionally, there was a significant level of cross-holding amongst various holding companies and ownership was often cloaked to avoid any country-specific bias (for example, Germans established a holding company in Switzerland to invest in France and vice-versa as there was fierce German-French rivalry). This made a complex pyramidal structures with a lot of investment often being controlled by similar set of companies and investors. Further, these activities were carried in two models: entrepreneurial and buy-outs. Rings a bell? These are two major investment directions in the Private Equity world as well. This helped me to understand that many activities considered almost vintage Private Equity are in fact much older.

Technology, Design or Something Else?

I recently came across a blog discussing the importance of technology vs design for a product. I beleive that such discussions show how living in one particular domain can seriously hamper the breadth of vision. Like the classic blind men interpreting the elephant in different ways, each person tends to interpret his or her interpretation as the most important one. When you are talking about a product, you are talking about business. And business is a sum of parts. Nevertheless, from business point of view, elements like marketing, service and reach will always dominate either technology or design. Technology and design have to pass a minimum threshold. Beyond that the client retention and longevity of a business is too deeply dependent on the above mentioned key factors. A business is made by the people who run it, who have a vision to find innovative use of design or technology.

Not many engineers or designers go on to become the CEO of a company (unless they start their own company or get business education). This is not a co-incident. Technology and design functions require lesser people management than most other functions. They are also, generally, least political. To research and to simply come up with ideas is not enough. The ability to find practical uses for the ideas, to be able to take them to people profitably, manage people and then sustain the process reliably over a significant duration defines business. Any successful entrepreneur can tell you that technology or design is but a small, though important, part of the whole equation.

Global Electrification: Introduction

Now, I have started reading "Global Electrification: Multinational Enterprise and International Finance in the History of Light and Power, 1878 - 2007" by William Hausman, Peter Hertner and Mira Wilkins. In the last century, electricity and railroads were two prime forces that changes the face of earth politically, socially and economically. Hence, I am pretty curious about the journey of global electrification and the role of international finance in its development. And so far I find the book pretty interesting.

A few key patterns emerge and re-enforce themselves across various business history books I have read (including the current one). The key time periods that emerge are pre WW1, WW1, roaring 20s, Great Depression, WW2, post WW2 in cold war and post cold war. The whole world saw a lot of change across this timeline. Let us see what we can pick up about electrification and the evolution of business across this timeline.

The countries that played a predominant role in global electrification include Germany, USA, UK, Canada, France, Belgium and Switzerland. Especially Belgians had the first-mover advantage in the domain and continued to be pretty influential well until 1940s (the point till which I have read the book!). The names of Sofina and the Empian group particularly stands out as an influential Belgian holding companies. Germany, pretty predominant on the electrification scene before WW1, rapidly lost its influence after the first Great War and was thrown into a very turbulent time that just kept getting worse. Nevertheless, German manufacturing did reasonably well and some German firms like AEG and Siemens managed to invest internationally either directly or through association with Swiss/Belgian holding companies. The war also saw US getting cash rich and then investing its big piles of cash to electrify communities around the globe. In fact, by 1930 utilities were numero uno in terms of foreign direct investment from the US. UK was not able to capitalize on the decline of Germany and saw its power declining rapidly post WW1. It electrical industry remained mediocre at best. London, however, had the deepest pockets till WW1 and most entrepreneurs who wished to invest in electrification registered their company in UK or Canada to tap these funds easily. Post-WW1, US rapidly displaced UK as the number one destination for raising funds for electrification. UK itself turned more inwards, with the Government feeling that any external international investment would perhaps come at the cost of any internal domestic investment. There was clamour about replacing dependence on finance with dependence on manufacturing of "real" goods (which, strangely, does not sound too different from what I hear today after the recent economic crisis). This, overall, made UK influence on electrification weaker. Even with soft-loans to promote sales of capital intensive equipment for electricity generation, UK electrical manufacturing industry did not do particularly well. Even their massive investments were either sold off or overshadowed by Americans. The role of Canadian entrepreneurs and holding companies in electrification also stands out. In fact, even though US-UK were main source of cash, Belgium and Canada were the main sources of dynamic entrepreneurs, management talent, engineering resources and holding companies. The book is ambivalent about the role of France as I don't see any particular strengths or weaknesses emerging out of the description of their electrification activities. Nevertheless, they did invest in electrification of their own country and their colonies.

Are B-Schools Failing to Produce Business Leaders?

One of my friends brought to my notice this topic for a debate that took place recently in a business school. What are my thoughts about it?

I believe that leadership is the ability to guide a group through difficult situations without seriously compromising the cohesion of the group and keeping in mind the long term consequences of the actions. Extrapolating it a bit further, I would say that leadership is a direct function of the willingness to take responsibility, decisiveness, perseverance, clarity of thought, empathy, self-awareness, reasoning, integrity, openness to change, ability to moderate tense discussions and lack of hubris (please feel free to add if you think I missed something!). And this, I believe, cannot be taught though it can be learned, i.e. somebody who wants to become a leader can possibly cultivate these traits over a long time, but you cannot teach them to somebody in a year or two. Leadership, talking in mathematical terms, is the vector resultant of a personality that cannot be altered overnight.

Elite B-Schools attract top-notch talent, but does it really translate into great leaders for the society? Let me play the devil's advocate and talk about the possibility that business schools are indeed not producing as many business leaders because they do not need to produce that many leaders: not all roles assumed by MBA graduates require strong leadership skills. How much of a leader does an Investment Banker needs to be? Similarly being a technically brilliant manager is not always the same as being a natural leader. A people-person could excel and even grow in sales, marketing or HR without actually being a good leader. An analytical, people person could excel as a consultant. And so on. Leadership is good to have, but is it mandatory for graduates to be economically successful? Moreover, elite B-Schools can, and do, build a mentality of entitlement in their graduates which can be totally anti-leadership. Hence, in all possibility, the assertion may be quite true: B-Schools are indeed failing to produce business leaders for the simple reason that they were built to educate brilliant people to contribute meaningfully to a business, and many such functions can be achieved without strong leadership skills.

I think that business schools are excellent facilitators of the talent. In fact, they can nurture it and provide an excellent network to support some brilliant minds. Hubris, however, can be the bane of elite business school graduates. Most of the people would like to think of themselves to be leaders, but very few really are. Of those that are, very few would like to take the hassle of exercising it. In fact, fat salaries and corporate growth is possible without good leadership. Business schools can be excellent learning grounds for people willing to grow as a leader, but I am not sure if that would really happen. Good leadership is simply a scarce commodity.

Musings on Existence

In the realm of relativity everything is unreal and the search for absolute is the vain hope for a world devoid of change. Change is the only absolute in the mortal world; everything changes. And in this flux of everlasting, constant change I strive to define my life and the reasons behind it. I try to define the root of my happiness, sadness, worries, celebrations and all else in between. I try to find "me". I try to understand this creation. I don't find many definite answers, so I treasure the ones that I do find.

The subtle manifestations of cause and effect are undeniable. Yet, in the short-term life can be random. And in the long run? Well, as somebody said that in the long run we all will be dead. Perhaps there is an after-life, perhaps there is not. Perhaps God is the psychotic, vindictive, maniac people make him out to be. Perhaps he is simply a disinterested third-party observer watching his inferior experiments with disdain. I don't know. I don't know if there is a heaven or a hell, or if there is any meaning to life. I just know three things: I exist, I can think and I wish to excel.

Many philosophers deny existence, labelling what we see as an optical illusion conditioned by the mind. Having studied semantics, logic and cognition; I do have sympathy for some of their views and I can definitely see from where they are coming. Nevertheless, I think denying the entire existence is a shade too extreme. At most we can see ourselves as deluded or conditioned, from which one can escape by simply desiring to be free and by keeping an open mind.

NCIC: Conclusion

Finished reading NCIC. Overall, the book has helped me to appreciate the significant role of political risk in the life of a company. The story of Schering seems like a twisted and horrifying parody based on novels of Ayn Rand. While Rand writes about excellence and mediocrity as clearly defined and antagonistic groups working against each other, the truth is much more complicated. In making her characters so one-dimensional, Rand does manage to crystallize the essence of creativity and mediocrity. NCIC highlights the shades of grey that dictate human behaviour in the real world. This book on Schering, however, demonstrates how these colours can play with each other to produce many variations.

Between the world wars the German business, despite of its several advantages, succumbed to a destructive Nazi rule and, in some cases, even fuelled the ambitions of a destructive, racist regime. Companies like Schering simply tried to find a balance in order to ensure survival, but those like IG Farben actively exploited the adverse circumstances for profit. Schering's excellent marketing, scientific research and quality of manufacturing helped it to build a formidable brand and maintain profitability even in the most adverse of circumstances. Nevertheless, as politics took precedence over economics and as chauvinistic nationalism became fashionable, Schering struggled. Business, in general, either refused or failed to understand the power it wielded. Perhaps, the behaviour is not very different from citizens who do not vote, avoid participating in politics and complain about the quality of politicians. It is definitely not the first time that inertia and narrowly defined self-interest have caused problems for a society, but it is appalling to note that the same pattern has repeated itself for centuries without people learning from it. Indeed, who do not learn from history will be condemned to repeat it.

Concluding, there are a plenty of things to learn, both what to do and what not to do, from the story of Schering. The book will also enhance your understanding of the development of the German business in particular and knowledge-based industries in general. Finally, it will help you to appreciate the reason why the political environment of a country is critical to the success and sustainability of a business and how the culture of a country can be critical in determining an organization's strengths and weaknesses.

What Philosophy Is

Philosophy, like art, is an attempt to express the abstract with words and logic. To twist perspectives to try and synthesize all dimensions, as if the attempt would find a solution to the Unified Theory of Physics. To find the one in many and the many in one, to look for that one fundamental principle that runs through every thought that ever was and that shall ever be. It is the quest for freedom from the connundrum of life and its meaning, the song of love that the thirsty soul sings for the Goddess of thought and action. Philosophy is the real you in you, the thought behind your every action and reaction, the mark of your awareness and love for life. Philosophy is indeed love for wisdom.

Understanding Private Equity Fundamentals

In parallel to reading about pharmaceuticals, I have also started reading "Private Equity: History, Governance and Operations" by Cendrowski et al. I just wish to understand the place and importance of Private Equity (PE) from point of view of a future entrepreneur. The books consists of four modules: history, governance, operations and special considerations. I will simply record my main observations for future reference.

Reading about history, I understand that PE is a relatively recent phenomenon with its roots in the USA. In fact, the book is primarily written with US in mind. Nevertheless, I hope the basic working and attitude would not differ significantly across borders due to a close-knit PE community. It explains the structure of PE firms and general terms used in the industry (e.g. describing what is a general partner or a limited partner, the fee structure, legal agreements and other legal aspects). The books focuses primarily on two type of PE investments: venture capital (VC) financing and buyout transactions. It is interesting to learn that VC funding is further classified as Angel Investing, Seed Funding and Later Stage VC depending upon the maturity of the product portfolio. PE has developed as a distinctive alternative investment vehicle whose profitability is highly dependent on the overall performance of the economy and government policies (especially wrt Capital Gains Tax Rate).

Due to comparatively higher rate of returns many institutions and high-net worth individuals wish to invest with a PE firm. However, it is a very tightly knit circle that works on "knowing" the right people and by being successful. While the top quartile funds are plush with funds, others struggle to raise basic amounts. It is a highly competitive arena where success breeds more success. In the last decade buyout funds have apparently performed better than VC funds. Consequently they find it easier to raise money.

There are primarily two ways in which the PE firms "harvest" their investments: Initial Public Offerings (IPO) and Mergers & Acquisitions (M&A).

The book notes that IPO can be an expensive, lengthy and cumbersome procedure. It not only depends on the prevalent market condition but also it enforces more complexity and regulation on the organization. Nevertheless, it can be seen as an important step in the life of a company signifying a strong historical growth. It also allows the entrepreneur to possibly maintain the control over his company, something that he may loose in some M&A transaction.

Takeovers are defined as horizontal (same industry), vertical (supporting industry) or conglomerate (unrelated). The can be further seen as strategic, defensive, growth or financial. Reverse Takeover is mentioned as a credible and more efficient alternative to IPO. The company can be acquired either in an auction (can turn-away strategic buyers but attract financial buyers - the company's financial advisor may favour this as it may lead to more fee. Overall useful if there are not many keen buyers) or an exclusive offering (attracts strategic buyers, can be attractive for the entrepreneur. Advisable when there exists many strategic buyers with a high level of interest). It is important for the entrepreneur to realize that he may loose control of the company in this harvesting strategy. The popularity of M&A has increased significantly since 1999, something that has further bolstered buyout funds.

NCIC: Between the Wars

Between the two world wars, Schering did reasonably well. This was done by spending substantial amount of revenues on marketing, establishing foreign subsidiaries, investing in research, taking care of its employees, localizing the product, giving cultural training to young managers and forging alliances. Marketing and advertising alone consumed as much as 30% of revenues. The wars, turbulent political and economic circumstances, rise of protectionism after the Great Depression, hostility to German products after WW1 and Schering's own bent towards socialist policies prevented the company from realizing its complete potential. To make the reader understand the circumstances in a better way the writer takes great pains to elaborate the effects of WW1, the problems faced (and created) by the Weimar Republic and the final havoc unleashed by the Third Reich. In modern context, when I read about Germany, I am reminded of how Beirut passed from total prosperity to total chaos. Something similar happened to Germany with WW1. It is a wonder that Germany is what it is today despite all the hardships suffered and problems faced. I can make out as much that the writer has a soft corner for Germany. Nevertheless, the book makes me feel pretty curious about Germans.

Another thing that strikes me is that power dynamics has witnessed an incredible amount of change in the last 150 years. The number of wars and turbulent circumstances has been shocking, and all countries have had their share of troubles. This has not only defined their attitude towards the world but also their own self-perception and way they organize themselves. Unfortunately, sometimes the response to mitigate an adverse situation makes things worse. Particularly, a culture of entitlement or one of seeking more rights and powers but lesser responsibilities and accountability can really eat away the vitals of an economy like termites. The understanding of history, politics and economics can seriously increase the efficiency of a business man, giving him a wider vision of the world in which his business operates.

NCIC: Story Before WW2

Read till just after the WW1. Pharmaceuticals industry was historically closely related with the chemicals industry. Camphor, rubber, oil, coal, wood and turpentine oil were some key raw materials. The growth of pharmaceuticals as an important part of the economy has been phenomenal. The demarcation between a purely "chemicals" based business and pharmaceuticals was a blurry one. IG Farben, Bayer and Merck come up as the big German players in the industry. In context of the book, Du Pont also comes up as a major player; a name that before reading this book I had associated more closely with chemicals and its close relation with GM. Schering, though a smaller player, comes across an important player with many innovations, including economically viable synthetic camphor, attributed to it. Its contribution to photography chemicals and contrasting agents also stands out.

Nevertheless, I find the company a bundle of contradictions. Its innovations contrast sharply with its conservative, inward looking, relationships based approach. The way it resisted international investments and engaged in cartels are not exactly the hallmarks of a confident company. I understand that nationalistic passions were running pretty high at that point of time in the history. Germany's bitter experience with WW1 did not help things either. Nevertheless, the fearful attitude and shortage of good managers did affect the growth negatively. Relating it with the history of Deutsche Bank, I also feel that relying on private contacts and relationships was very much a part of business in those days. So much for merit, intelligence and hard-work. Connections and being in the right family could be the making or breaking point. It is good to note that in today's world the number of opportunities has increased, though not equally in all countries. I am not sure if nepotism and elitism will ever go away, but information technology advances have definitely enabled and empowered people to start a business more easily. Three cheers for IT!

Finally, after reading a lot of sugar-coated management books, it is good (though a bit bitter) to read a book grounded in facts. Hard-nosed realism. The complexity and shades of grey that it brings out are, well, enlightening. The sooth-sayers are not wrong, but it is good to know and realize that not everybody is in business with the same motive. Business history ultimately judges a company by its ability to build perception and the end results. It also brings out the role of politics and luck in the life of an enterprise. It demonstrates that there can be umpteen ways to reach the same place, and it is alright as long as you are willing to make the journey.

National Cultures and International Competition (NCIC): Connecting Dots

Continuing my reading blitzkrieg, I am now reading; " National Cultures and International Competition:The Experience of Schering AG, 1851–1950" by Christopher Kobrak. Down the first 100 pages, the book looks interesting.

The first thing that I gather from this book is a better understanding about German historical attitude towards business. The presence of two boards in German companies, developing a "community of interests" and legalization of cartels to counter effects of economic difficulties and capitalism, the effect of wars on German economy (and psyche) and why coal and iron were so politicized are few key points to learn. In fact, it relates very well with why coal and steel were the primary focus in the 1957 treaty of Rome. For the first time I am able to appreciate the difference in business attitudes in Germany from UK, US and India. History does help you to appreciate the present and to avoid mistakes in the future.

The second thing I realize is that Germany was in a very formidable position before WW1, with only US hoping to do as good. With WW1, US expropriated 506 German companies and 12000 German patents. This, along with the American capacity to organize and think big, the managerial revolution, elimination of its biggest rival, a favourable geographic location and war sales bonanza transformed US forever. Whatever was left was sealed by WW2, when dollar finally replaced pound. The more I read, the more events interconnect and make sense. I guess victor's justice is a truth of life, and I have to also watch out for the personal bias of authors keeping in mind that this is but one side of the story.

All in all, an interesting start. Will keep you posted.

Banking on Global Markets: Conclusion

WW2 and the subsequent division of Germany into two parts saw the beginning of a new era. Dollar replaced Pound as the world's reserve currency, the Cold War began and Bretton Woods system cam into being. West Germany was right at the frontier of the Cold War. Formation of NATO, fear of Communism and the 1957 Treaty of Rome let to stronger cohesion in the Western powers. Overall, the German economy in particular and Western economy in general did pretty well. Despite the protectionist and nationalist passion carried over by the previous era, the period after WW2 saw denationalization of finance. This was a direct result of free-convertibility of currencies and the ease with which money could move from one country to the other. If anything, the advent of information technology made the process faster and more difficult to control.

Under the able leadership of Abs, the Deutsche Bank managed to go through this turbulent period rather effectively. It was able to avoid American pressure to break itself and hold on to its structure of a "one-stop" bank. This brings out a very fundamental difference in American and German attitude towards finance in general and banking in particular. While Americans hated seeing too much power being concentrated in the hands of any one institution, Germans encouraged such institutions as symbols of stability and national pride. The specialized US Investment Banks, though, gave Deutsche Bank some serious competition and were more effective due to their focused agenda. Duetsche bank found it a little hard to adapt from a banking based on relations to a banking based on commoditized services and transaction carried over impersonal capital markets. As far as from 1870, boom and bust cycles have been a hallmark of capitalistic systems. Cartelization and groups of interest were especially strong in the German business to counter the effects of such cycles and deal with the effects of destructive competition. It seems the influence of this thinking lasted well after WW2. A strong nationalistic influence also made it a little difficult for Deutsche bank to adapt rapidly to other cultures. Lack of enough good management talent and shoddy acquisitions continued to haunt the bank as far as 1990. The two world wars, the division of Germany and subsequent reunification had a cumulative effect of not only hurting the bank's bottom line but also making it a bit cautious about international investments. Nevertheless, by 2000 with its acquisition of the Banker's Trust the bank had displayed some significant improvements, becoming a world leader in the business of global currencies, commodities trading and credit derivatives trading. Additionally, it is very clear that the American operations had a very strong influence on the bank in terms of revenues, management and getting a stronger footprint in investment banking.

Concluding, the story of Deutsche Bank is indeed the story of evolution of finance. The book gives a good insight into the working of the financial world besides bringing out the importance of political factors and international co-operation for the profitability of a business. The way Deutsche Bank grappled with changing international scenarios, different cultures and lack of management talent is particularly instructive for any company or individual who wishes to operate internationally. Finally, the way the Bank has survived in face of seemingly impossible obstacles is inspiring. A good book overall.

Banking on Global Markets: Story Till WW2

From 1870 to 1914 financial institutions operated on the basis of trust, relationships, family ties and politics. In a fairly globalized world, where the British reigned supreme and ensured European supremacy, exchange rates were fairly stable and cross-border finance relatively less risky and easier to implement. London was the primary banking centre while US and Germany were growing at a prodigious rate, and German technical know-how was already gaining respect and recognition. In this atmosphere, Deutsche Bank led the German effort to invest in the US and other parts of the world. After reading the first part of the book, I feel that in the US operations bad management and over-reliance on only few key people(Siemens, Villard and Adams) were the bank's Achilles heel. Notably, Villard played a roguish role, but managed to thrive due to his charisma and contacts. The bank ended up investing in companies that either took too long to give a reliable (or any) return on the deployed capital. Deutsche Bank found itself frantically trying to manage defaults by American companies and being stuck with investments it did not want. The biggest fiasco were investment in some railroad companies and in an upcoming coking facility. Only the investment in Edison General Electric (later General Electric), though not completely free of problems, turned out to be relatively good. Essentially, the bank found itself playing second fiddle to Morgan and Speyer in the American financial arena. Nevertheless, it seems it managed to turn out a respectable, if not excellent, profit.

WW1 saw finance and economics being made secondary to nationalism. As a direct result of the war protectionism and many socialistic values took deeper roots in many societies across the globe, perhaps with the hope of making a more just society. Nazism, fascism and communism found their roots as a result of economic problems, racism and aggressive nationalism. The period also saw the emergence of US as the world's richest nation, transforming itself from a debtor to a creditor nation, essentially fuelled by its managerial revolution and profits from war. Its strong influence shaped banking regulations with retail banking, investment banking and management consultancy coming out as three distinct fields. Germany, from advising the US to have better financial policies, found itself on getting lectures from Americans about the same; a remarkable reversal of roles in the span of few years. It also found its concept of universal banking directly at odds with its American counter-parts.

Between the two world wars, Deutsche Bank increasingly found itself between a sharp rock and a very hard place. From managing the default of American companies it found itself managing the anger of US investors over default of German companies. Its role in the Nazi government brought it a great deal of notoriety. The wars also saw it loosing many assets to "legalized theft" or Government confiscation. Two wars, strong nationalistic policies by Government around the globe, a hostile dictator at home and effort to help its clients retrieve the assets lost to confiscation took a toll on its profits and performance. It continued with its reliance on relations and a few key people to get things done. Overall, I feel that even though Deutsche Bank's performance was below par in this era due to a host of difficulties and adverse situations, there are quite a few lessons that one can learn by reading this text. It nicely brings out the various pitfalls of an overly centralized management, problems inherent to operating in a different cultural environment, the pros and cons of over-reliance on contacts for business, problems with a leader who can get things done but cannot mentor and the possible effects of unforeseen circumstances, natural disasters and wars on a corporation.

Banking on Global Markets: Inside a Black-Box

I have started reading "Banking on Global Markets: Deutsche Bank and the United States, 1870 to the Present" by Christopher Kobrak. To say the least, the book is really fascinating because I think it may demystify the working of powerful banks to some extent. Till now I was reading more about relatively idealistic management literature and theories, where ability, self-awareness and vision are the defining factors. This book, however, brings out the aristocracy of pull rather beautifully. I don't know how much of it has changed over the years, but from about 1870 to well into 1914 (till the point that I have read) banking was the domain of a few rich and powerful banking dynasties like Rockfellar, Morgan, Speyer et al. Business was done more on trust and personal bonds rather than anything else. Level-4 leaders or abject self-promoters were the only other people who could hope for success in these transactions. The writer mentions that the Banking Dynasties operated somewhat like European Royal Aristocracies. And they had a frighteningly strong hold on businesses and economics, something that I reckon continues till date.

A detailed, thoroughly researched and well-written history of Deutsche Bank wrt US also serves as an interesting read for anybody who hopes to do business in a cross-cultural environment with unpredictable laws. In many respects, by the time 1900s started, US was pretty much at the juncture where China is today (and US is where UK was then!). There are a few uncanny similarities: the banks find a rapidly growing economy too hot to ignore but do not know how to best deal with the unpredictable regulatory environment. I am really positive about this book and I hope it will provide some wonderful insights into the inner workings of the best financial institutions of the world.

Built to Last: Conclusion

Just finished reading "Built to Last" and I must say I am not very impressed. The book seems to be a research "inspired" by a well-packaged mix of works of Peter Drucker, Tom Peters and Robert H. Waterman. Further, many a times it starts sounding more like a self-help book than a business book for a serious reader. For somebody who has no previous business knowledge, this book may seem pretty good, but for anybody who already has a reasonable grounding in management theory this book is simply not good enough. Even its findings are mired in too many generalities to be of any significant use except perhaps as morale boosters. In fact, I feel that to the uninitiated it may cause more harm!

Nevertheless, the actual data and examples about some great companies is invaluable. They can serve as good examples in management group discussions or lectures on management theory. They can also help a management student to create a more practical and concrete picture of theories propounded by Peter Drucker. The book may also prove useful to quickly recap some useful management basics that can possibly work in certain situations.

Concluding, even though history has much to teach, to exclusively use historic data for decision making may not help. I still believe that nothing can replace a good leader and active thinking.

Built to Last: Thinking Growth

Reading more of "Built to Last", the writer identifies two major ways towards growth: audacious goals and continuous, incremental learning. As self-evident it may seem, these goals are indeed difficult to put in practice. Further, to sustain the effort and mental discipline for this, the goals need to be backed by a strong cultural identity. Here, the book is pretty similar to "In Search of Excellence". In fact, I feel that it simply takes the ideas presented by Waterman and Peters to their logical next step, exploring the cultural aspect more thoroughly and expanding upon the idea of "sticking to the knitting". Overall, it has helped me to strengthen my understanding about building a successful organization. Nevertheless, I do have my doubts on one point- that a company does not need a successful product to start with. I agree with the examples of HP, P&G, 3M and Sony; great companies that did not start their lives with successful products. Experimentation enabled them to stumble on good products and then move ahead. Hence, I understand that a super product/idea is not a pre-requisite for a great company. In financial terms, however, the amount of capital this can eat up and the difficulties it may present to sustain a start-up are a bit jarring. For every Sony that makes it through these turbulence, there will be a 1000 who won't. Starting with a good product can provide the entrepreneur the necessary cover to launch his company, provided he does not get too much stuck up with the first product. Overall, I think it would make the whole process less painful.

The book also plays down the importance of MBAs, sometimes actively disparaging them. I am sure it has good reasons to do that. Nevertheless, to judge a degree by few of its people is unfair. To judge all lawyers by example of ambulance chasers would not present a very pretty picture. Similarly, an MBA can prove to be a potent catalyst depending upon the experience, orientation and calibre of an individual. It can help a person to take a more comprehensive view of a business and develop a broader outlook. Nothing can replace a Level-5 mentor, provided one has the inclination to learn. All the same, an MBA can have its own utility and accelerate the process of learning. Even for entrepreneurs, it can help to make the journey to independence smoother.

The book is written brilliantly, but it is still a research. It is definitely not a brand new idea and builds upon previous works in similar direction. The real world examples provide wealth of useful data. The interpretations of the data is reasonably good, and would prove to be more useful if read in conjunction with the history of one of the mentioned visionary companies and in knowledge of earlier works in management theory.

Of Banks and Crisis

Reading about Obama and his socialist cronies baying for blood of the banks got me thinking once again about the recent financial crisis.

Government tells banks to lend to people who are not credit-worthy. Banks are not sure, so Government decides to guarantee such loans. After all the American dream means at a least an owned house for every individual. No matter if he is a worthless bum. By virtue of being a human being and an American citizen he deserves the loan. Nevertheless, the risky loans demand high interest rates. If Government wants to gamble the money that it has earned so painstakingly from tax-payers, who are banks to interfere? Besides, getting interest rate reserved for junk bond while holding Government backed AAA+ investment was too good to let go I guess. However, like the proverbial mosquito who drinks so much blood that it is unable to fly, reality caught up with the banks and the Government. Of course the Government cannot be wrong, especially as it thinks about people. Didn't it help its citizens to go on a debt-fuelled consumer frenzy by keeping interest rates artificially low? My, it really cares for its people. Especially the tax-payers and savers. So, banks were the devils who created this spectre of mortgage based securities that threatened to swallow the world. But were they the only ones to blame? I guess not.

My question is simple: why should banks lend money to any worthless idiot because the Government wishes it so? And if they are forced to, why cry foul if they manage to take advantage of it? That is what you get when two looters play chess with each other. Might is right, so the Governments escape blame in name of helping people. But let no one delude themselves into thinking that banks could have pulled this one off all alone. I don't think that banks should suffer the price of socialist dreams because I do not believe in socialism. People who expected banks to self-immolate to satisfy their mediocre vote-banks got a well-deserved shock. And, by all means, the people who allowed and accepted such a system in name of social justice have only themselves to blame. It is a world governed by the laws of cause and effect, and everything we do or don't do has consequences. The banks simply turned a cannibalistic system against itself, but they did not invent it.