Before you start reading this blog I want to make you aware that I am big fan of Google like many of you but I am playing the devil advocate to fuel debate. I am in minority group who though being an ardent reader didn’t like the book Google Story because I perceived the book to be one of the marketing techniques of Google rather than its true story. There were only positives about Google and that is what I see is the perception of most of the people. People have been made to believe that Google stands for philanthropy, they want to make life of people better by providing them access to vast amount of information at low cost. At same time Microsoft is being perceived as giant monopoly crushing any opponents in the industry with only aim to earn huge profits. Every computer science graduate dreams to be in Google and brand Google now stands for innovation, noble cause. There are ample of articles and cases that document work culture at Google, their success story and their noble intention. People are speculating that there is nothing that can stop Google’s growth. But there are few people who have raised doubts on Google. Most famous being by Dr. Benjamin Edelman, assistant Professor at Harvard Business School, whose article in HBR about how Google’s Ad deal with Yahoo is nothing sort of monopoly was really alarming. This blog has been inspired, in fact most of points have copied from famous article ‘Google Engima’, published by Booz Allen and I am just putting my interpretation of that. So credit goes to them for these insights which I think we should know before we try to emulate Google in our business.
Let’s first see the Google’s claim of providing information for free as no noble vision but rather perfect business strategy. It is similar to Microsoft strategy of providing Internet Explorer for free to destroy Netscape. However Microsoft was criticized for its action while Google actions are being considered as noble. That’s strength of good marketing communication. I know many of you won’t agree on this so let’s get some clarity. If anyone looks at Google revenue stream then it would be crystal clear that online advertisement business is its cash cow which generates more than 80-90% of its revenue. Now answer simple question when would online advertising industry thrive? Only when there are more users online i.e. using Internet. So who are the competitors of Google? Anyone who provides users with utility that doesn’t require user to use Internet. So if Google provides those utility online and with reduced cost in fact for free and similar or better performance then users would prefer online version then offline one. Thus it is a direct competition for Microsoft. It is very famous strategy of using complements to drive the main product. Google by its support to open source, developer group is doing nothing but reducing the cost of complements. Now look at all the product that Google gives out for free like Blogger, Google Docs, Maps etc and you will this why they are free. Because they make people connect to Internet and moreover by using Google products they get more information about the user preferences which turn helps it search engine. In fact the success of search engine lies with heavy usage of Google by people. Microsoft office suite is expensive and offline utility so Google came with its online suite. Gmail provides Google with one more avenue to earn through advertisement. So get out of philanthropy its business and Google derives its strength from this strategy which acts as big barrier of others. Let’s understand that now.
Lot has been written about 20% time which Google employees are given to work on areas of their interest and the liberty they enjoy. People have concluded this has been reason of Google being highly innovative and ahead of everyone. This strategy works for Google because the cost of failure of its new product is much cheaper for them. This is because Google normally introduces half developed product as Beta version in market and entire Google devoted fan club starts using it and promoting it. It provides them revenue from that stage itself through advertising and also provides important data on customer behavior. Other fact is that range of the compliments that can be developed are also huge. So any work done by its employees in those 20% time doesn’t go wasted. In fact it provides lot of learning which is most essential in knowledge industry, satisfaction to employees (which implies low attrition and low cost of attracting new talent) and huge marketing for the Google. If any product is developed successfully then more revenue is generated for itself. However that is not the case for others since cost of failure is too high for them. In fact closer analysis would suggest that this initiative also has complete business sense.
Now next point of contention is Google success because of all this practices or are this practices are being used by management guru’s to be cause for its success. Is there cost-effect relationship? If you consider most of the successful products in Google bouquet have been acquired. Google video was failure but Youtube an acquired entity is success. Other examples are Google Earth, Blogger, Feedburner, Orkut, wiki developer JotSpot are nothing but acquisition. So where is its innovation? Rather it spots and buys innovation and reinforces its own brand as innovator. In fact even the concept of bidding for advertisement was taken from GoTo by Google and it perfected the process later. It was also not its creation.Hey Google fans don’t swear at me I am just providing other side of story which is neither publicized nor communicated. All those fight against copyright restriction for free information is for their business. Ask any student how much dependent he is on Google for code, papers, forums, assignments etc. Google has been involved in battle against copyright material, privacy issues time and again and every time it gets away because it has been able to create an image of a noble organization working in larger interest of society. Its ties with academic world have also help to create this perception. So now answer is Google a case study for innovation or its marketing strategy?
As I told you all before I am big fan of Google and this blog is just one side of tale which is never thought of by anyone. At end of day Google is one the most successful business venture and there is huge learning for every one of us and I sincerely believe that.
Skyrocketed SENSEX : A Mirage
This post is meant for the novice investors who would have sudden jump in SENSEX and NIFTY and would have concluded end of the bear market. Suddenly one can see people talking again of SENSEX reaching 20000. Popular TV channels creating the excitement and hype around the frenzy market. At this moment I would like everyone to introspect and understand what has suddenly changed so much that we see such confidence. We must understand what this index numbers suggest.
First let us remove the misconception if anyone has that these numbers are real number. On NSE website one can get following statistics about the equity market:-
Traded Qty. (lakh shares) 84.3
Traded Value (Rs. crores) 170.32
This numbers should ring bell in anyone's mind. They clearly suggest that hardly any trading took place on NSE. Thus the stock prices at end of the day are some random prices which got matched. It might be just one trade which took place at that valuation and subsequently there were no buyers at that price.
Second let's look at other important data about the activities of DII's (domestic institutional investors)
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category Date Buy Value Sell Value Net Value
DII 18-May-2009 41.62 50.03 -8.41
This clearly suggests the intention of the institutional buyers. They were invested in the markets during the bear phase and booked profits today i.e. buy at low price and sell at high price.
Now let's look at NSE F&O market statistics
Index Futures and Index Options
Index futures saw a trading volume of Rs.1372.38 crores arising out of 65288 contracts and Index options saw 31003 contracts getting traded at a notional value of Rs.599.21 crores. The total turnover of the Futures & Options segment of the Exchange was around Rs.2599.35 crores.
Options on individual securities
Out of 233 securities, options on 48 underlying securities got traded. The total number of contracts traded was 360 with a notional value of Rs.16.24 crores.
Futures on individual securities
Out of 233 stock futures on 197 underlying securities got traded. The total number of contracts traded was 12467 with a traded value of Rs.611.51 crores.
Index Futures
Symbol | Open interest (Qty.) as at end of trading hrs. |
NIFTY | 39342850 |
MINIFTY | 1268460 |
BANKNIFTY | 961650 |
CNXIT | 8400 |
Index Options
Symbol | Open interest (Qty.) as at end of trading hrs. |
NIFTY | 82245650 |
MINIFTY | 10800 |
BANKNIFTY | 8400 |
CNXIT | 0 |
It is these huge open positions which people are trying to cover up which led to this sudden jump in the market. It was general expectation that people would elect hung house and thus speculators had taken positions in the market accordingly. But with the people mandate for single alliance without support of Left clearly raised hopes for reforms and more possibility of foreign investment pouring in. So in order to avoid huge losses speculators started to cover up positions. These open positions also suggest that such activity can be seen even tomorrow or in near future but this does not indicate any long term trend.
I know many of you would be against entire explanation of mine. You may say that markets are leading indicators and they reflect the future health of the Indian economy. Stable non-Left government indicates possibility of reforms and high growth. However my answer to all this explanation is that nothing has change in the neither global economy nor Indian economy in a day. The impact of the action which we speculate would be taken by government in near future can be seen only after a year or so at earliest. Further the valuation of any company cannot change by more than 30% in a day. The fundamentals haven't changed to that significant level. There is liquidity crunch at global level, less demand and a change in government cannot impact this in a day or a month or so. If we go by theory then the information of change in government is known to everyone and by efficient market hypothesis we cannot make profits because of this publicly know fact.
Thus its right market to sell and book profit or get out of bad investment. That's my advice.
China's Dilemma
In my previous post, I elaborated on the one of the point of debate that Dr. D. Subbarao (Governor, RBI ) discussed in his speech at RBI-BIS. In this post I am going to elaborate on his second point of debate. He believed most of the Asian countries especially China have held huge amount of foreign reserves as measure of self-insurance.Asian Economic Crisis in 1997 saw IMF impose strict conditions on bailout recipients.Most of these emerging countries felt that they hadn’t been treated fairly and thus to avoid themselves getting into such trouble they have maintained huge reserves. But is this self insurance viable policy? Is it serving the purpose?
India’s foreign reserve was more to do with capital inflows and with the crisis that turned negative and now we have deficit. China’s foreign reserve was from trade surplus and seems to be real. This would suggest that China should not face any problems at surface but that’s not the case. Problems are twofold. To earn this huge reserves China has made herself dependent on exports. Now this has become liability because the growth of your nation is now dependent on foreign economy for which you have no control. Current crisis exhibits the same problem.Next problem is are thess reserves for real?
There is a set of people who do not believe on Dr. D. Subbarao’s logic of self insurance. They believe China deliberately bought US dollars to manage the value of the yuan which provided the Chinese manufacturer cost leadership in market and thereby gain competitive advantage. In doing so China's foreign exchange reserves have increased from $216 billion in 2001 to $1.52 trillion in 2007, then $1.95 trillion in 2008, according to a Congressional Research Service (CRS) report published in March. Economists estimate that about 70% of those reserves are held in dollar-backed assets. These numbers on the face indicates the power China has over US by helping them finance their huge debt of $11 trillion. But then why does China not exhibit the same? Because the fact is that she cant without damaging herself. Lets look at Chinese investment portfolio. As risk averse nation it initially used to invest on US Treasury bonds which were considered risk free. Later on it diversified to riskier assets like investment in PE firm Blackstone and Morgan Stanley. They had bought $3 billion share worth $31 each of Blackstone whose value fall to $8 in October 2008. Similarly they had exposure to asset backed securities thus they lost of foreign reserves in such investments. Paul Krugman writes humorously in one of this article that they supplied us with poisonous toys and we gave them false assets so its like what you give you get. China subsequently purchased $44.5 billion and $65.9 billion of U.S. Treasury securities in September and October of 2008.Now China’s huge reserves are in form of US dollars and US bonds. If they starts to sell their dollar reserve then there is none presently in world to buy them thus it would bring value of dollar down. This implies value of China’s foreign reserve would also decrease by similar amount.To invest in its own country also she would have to sell dollar and buy RMB which would appreciate its currency and depreciate dollar.This would again affect its exports which have already dipped. If it does nothing then worry is that the value of the US bonds would decrease significantly due to rising inflation.
Thus China is in huge dilemma with what can be done with its huge foreign reserves. Neither can it invest nor sell. It would be great if some of the valuation guru’s of the world try to find the true value their foreign reserves. Further to add to her woes there is no other currency on which China can rely upon. So recently China has voiced the need for new global currency and its concerns about any action taken by US government which affects value of US dollar.So I still ponder is China really rich? Was her export oriented policy not correct? Is success story of China just limited to its even more reliance on US? In this struggle to be global powerhouse who has edge over other US or China? Co-opetition at its best.
India’s foreign reserve was more to do with capital inflows and with the crisis that turned negative and now we have deficit. China’s foreign reserve was from trade surplus and seems to be real. This would suggest that China should not face any problems at surface but that’s not the case. Problems are twofold. To earn this huge reserves China has made herself dependent on exports. Now this has become liability because the growth of your nation is now dependent on foreign economy for which you have no control. Current crisis exhibits the same problem.Next problem is are thess reserves for real?
There is a set of people who do not believe on Dr. D. Subbarao’s logic of self insurance. They believe China deliberately bought US dollars to manage the value of the yuan which provided the Chinese manufacturer cost leadership in market and thereby gain competitive advantage. In doing so China's foreign exchange reserves have increased from $216 billion in 2001 to $1.52 trillion in 2007, then $1.95 trillion in 2008, according to a Congressional Research Service (CRS) report published in March. Economists estimate that about 70% of those reserves are held in dollar-backed assets. These numbers on the face indicates the power China has over US by helping them finance their huge debt of $11 trillion. But then why does China not exhibit the same? Because the fact is that she cant without damaging herself. Lets look at Chinese investment portfolio. As risk averse nation it initially used to invest on US Treasury bonds which were considered risk free. Later on it diversified to riskier assets like investment in PE firm Blackstone and Morgan Stanley. They had bought $3 billion share worth $31 each of Blackstone whose value fall to $8 in October 2008. Similarly they had exposure to asset backed securities thus they lost of foreign reserves in such investments. Paul Krugman writes humorously in one of this article that they supplied us with poisonous toys and we gave them false assets so its like what you give you get. China subsequently purchased $44.5 billion and $65.9 billion of U.S. Treasury securities in September and October of 2008.Now China’s huge reserves are in form of US dollars and US bonds. If they starts to sell their dollar reserve then there is none presently in world to buy them thus it would bring value of dollar down. This implies value of China’s foreign reserve would also decrease by similar amount.To invest in its own country also she would have to sell dollar and buy RMB which would appreciate its currency and depreciate dollar.This would again affect its exports which have already dipped. If it does nothing then worry is that the value of the US bonds would decrease significantly due to rising inflation.
Thus China is in huge dilemma with what can be done with its huge foreign reserves. Neither can it invest nor sell. It would be great if some of the valuation guru’s of the world try to find the true value their foreign reserves. Further to add to her woes there is no other currency on which China can rely upon. So recently China has voiced the need for new global currency and its concerns about any action taken by US government which affects value of US dollar.So I still ponder is China really rich? Was her export oriented policy not correct? Is success story of China just limited to its even more reliance on US? In this struggle to be global powerhouse who has edge over other US or China? Co-opetition at its best.
Can we have negative market risk premium? What does that imply?
This is post meant for all finance guys. First let us get basics correct.What do you mean by market risk premium? It simply means the excess returns over the risk free rate that is expected on his investment in market by the investor because of the risk he undertakes. Next is how do we calculate this risk premium? The most commonly used method is to use historical data. We calculate average return on the market and subtract average return of risk-free bonds for the same period to determine market risk premium. So in normal scenario we assume that at going concern the future market risk premium would be same as the past.Now the problem has arisen because of the current financial crises which has led to situation that long term risk free bonds have yielded more than the market during the same period. So if we continue to use this method then we would have negative market risk premium.
I know many of us would have at first instance not agreed to negative market risk premium. Does this actually make sense or method needs to be modified? Let us consider the investment with positive beta in which case cost of equity would become less than risk free rate. So it implies that company would have to pay its shareholders less than risk free rate!! Then instantaneously most of us would suggest that any sane person would sell off his shares and rather invest at risk free rate. This is what happens at outbreak of financial crisis.Investors withdraw the money from stock market and markets tumbled. People invest this money in the bonds of the banks which are considered to be risk free. Under normal circumstances, Banks would cut the risk free rate with huge inflow of capital. This will continue till market risk premium turns positive. Thus for short time market risk premium can be negative but over longer horizon it would always remain positive.
But is this what happen in current financial crisis? In that sense current crisis in US was quite unique due to high leverage in the economy.First of all risk free rate i.e. interest rate in US(if you still consider it to be risk free) were already very low which implied lower deposits with the banks. Second the securitization had created system which was highly leveraged i.e. in simple words people consuming more than money they held. It worked fine till leverage became so high that financial institution itself defaulted. This broke the chain which circulated money in economy. People withdrew money from stock,bond markets but unlike other crisis instead of depositing it with bank they needed them for their consumption. So banks faced liquidity crunch and their investments weren't yielding the expected returns due to fall of stock market. Rate were cut to almost zero but market returns remained negative.Thus we never reached a situation wherein market risk premium became positive. At that point cost of equity was negative which implied that investor expects nothing as return in fact expects to pay to get invested. This is what US government did by means of bail out package wherein it bought stakes in Citibank and others.They enhanced liquidity in system and tried to reinstate confidence in market so that the expected market returns become higher than risk free rate leading to positive market risk premium.
In nutshell market risk premium has to be always positive and if turns negative then steps are taken to make it positive. In other words for the survival of the economy expectation from the market should be positive at any point in time. Long term negative market risk premium i.e. negative market expectation indicates failure of the economy.
I have done quite complex analysis and have written complex blog about the current crisis. I hope it makes sense.
Financial Crisis Gyaan Part1
I was thinking topic for my next post and decided upon to write about something that has affected us badly especially all 2009 graduates. Almost three financial quarters have passed to fall of great Lehman Bros but still discussion about the crisis have not ended and neither crisis itself. I can recollect every professor coming from US giving their own perspective (“gyaan”) about the crisis. Initially as management student we were quite interested to know their views but later became wary of the same. Financial crisis was topic of discussion be it academician, industrialist, regulator, blogger or politician. Now that I am MBA I am obliged to share some of my esoteric gyaan on the topic. So out of innumerable articles and studies that I have read today I plan to write from Dr. D Subbarao (Governor, RBI ) speech delivered at one of the RBI-BIS seminar. He presented 5 points of debates and this post I aim to cover the first one. His views are more from macroscopic view of crisis and he rather question imbalance at economy level. I think I need not expand more than just few sentence since we all are aware of the same. He commented on high amount of spending by US and their high trade account deficits on one end and high saving and huge trade surpluses by China on other end. In order to provide liquidity in their system, highly sophisticated financial products that were engineered by financial experts created base for the crisis. There is broad level agreement on this but important is the questions this generates for the future. Consider we have magic wand which can get us all out of this present crisis and we are entrusted to develop system that would prevent such crisis in future. So what’s next? How do we act upon this imbalance?
Consider demographics most of the developed countries have aging population which are going to consume more than they produce and emerging economies have young population which would produce more than it can consume. Consider psycho-graphics, population in developed countries are used to luxurious lifestyle and have high propensity to spend. They have not faced many hardships during their life and thus do not attach more importance to saving. While population in emerging economies have fought their way through difficult times and therefore have more tendency to save. How are we going to change this? Is there any solution once we overcome this short term financial crisis? We can neither change the demographics in few years nor psychology of the population. So what it points to that after we overcome present situation we would have few good years maybe decades but again such crisis would surface since there is no way we can change or alter global imbalances. Maybe in few centuries we could also see reversals of roles among countries or Asian economies being replaced by African and American-European economies being replaced Asian economies. Who knows? Maybe good topic for Harvard guys to research and publish.
Also I am wondering after reading the post how would you view now the recent news item that increase in American spending has been observed after three quarters and China and India also showing increase in industrial production. Every news channel showed this with stock markets going up and most of the people were considering this as end of crisis except for one individual that is me.
Consider demographics most of the developed countries have aging population which are going to consume more than they produce and emerging economies have young population which would produce more than it can consume. Consider psycho-graphics, population in developed countries are used to luxurious lifestyle and have high propensity to spend. They have not faced many hardships during their life and thus do not attach more importance to saving. While population in emerging economies have fought their way through difficult times and therefore have more tendency to save. How are we going to change this? Is there any solution once we overcome this short term financial crisis? We can neither change the demographics in few years nor psychology of the population. So what it points to that after we overcome present situation we would have few good years maybe decades but again such crisis would surface since there is no way we can change or alter global imbalances. Maybe in few centuries we could also see reversals of roles among countries or Asian economies being replaced by African and American-European economies being replaced Asian economies. Who knows? Maybe good topic for Harvard guys to research and publish.
Also I am wondering after reading the post how would you view now the recent news item that increase in American spending has been observed after three quarters and China and India also showing increase in industrial production. Every news channel showed this with stock markets going up and most of the people were considering this as end of crisis except for one individual that is me.
Ways to Profitability
This is one of the lecture of my last course in marketing to which I had paid attention and it was worth it. The theme of the lecture was different strategy to increase profitability for the company. The measure for profitability that was considered was return on investment (ROI).Though I am not convinced whether we can consider ROI as true measure of profitability but still I consider the strategies are worth mentioning. There are four techniques which are employed by the companies namely:-
1) Cost Efficiency: - I don’t think this strategy needs much explanation. Entire outsourcing is based on this fundamental. We reduce the cost and thereby boost profits and thus ROI increases. South West Airlines is very good example of this strategy.
2) Premium pricing: - This is very common point reiterated in all marketing lectures. It is always taught that company should differentiate itself and charge premium for the same. This strategy has been successfully employed by Sony in the past and now Apple.
3) Increase Turnover: - This strategy needs some explanation. Above two are very common and it is very easy to find their implementation. Let us consider very simple example where in I manufacture a pen for Rs 10. I sell a dozen in week at Rs 15 each. So one week ROI is 0.5. Now instead of that now I sell a dozen in half week at same price. Then at end of the one week my profits would be twice at same level of investment. Thus now my ROI has increase to 1. Here we have assumed that you manufacture again by investing amount received by selling first dozen and have ignored time value of money of extra profits earned (Rs 60). So in nutshell this strategy suggests to increase working capital turnover and thereby increase ROI. Note there is no correlation between profit margin and ROI here. Most of the FMCG companies have implemented this strategy successfully.
4) Cash management: - This also needs very detailed understanding. Very good example of this is DELL. One can sell goods lower than the cost price and still have positive ROI if it implements this strategy. Here you charge your customers upfront and provide service/goods later i.e. receivables upfront and payables are delayed. You actually have negative working capital. So now for people weak in finance might wonder how could this increase your ROI and many would be startled by having negative working capital. But we you pay closer look you are using your receivables to fund your company thereby decreasing the investment required so net result ROI increases. DELL successfully employed this strategy and changed entire competitive landscape of its industry. So if someone asks you that can you make profit by selling lower than cost? Think twice before you answered that question.
I wonder I can still remember the stuffs. That’s great.
