Experiential Learning

This post is going to be quite uninteresting because it is about mundane stuff which all of us experience everyday but still make mistakes. It is especially key learning of fresh MBA entering the corporate world. Even though I had previous work experience and knew this very well but still a stint in academic changes the mindset. These are my 3 most important learning in first two months of work:-

1)Expectation Management :-
MBA coming out of from B school working 20 hrs a day, learning a merger and acquisition case study, developing pricing strategy for new product, understanding the impact of globalization, doing industry analysis using Porter framework as part of assignments that too in a day, one can imagine his expectation from the corporate world. He considers himself fully ready equipped with all sort of management ammunition to attack the “bottom of the pyramid” and "creating value for the shareholder". He is waiting for companies to embrace him and ask him to turnaround their company. Don’t get bewildered, this is practically most of the MBA’s expectation to work as management consultant/investment manager/brand manager etc. And please don’t ask about salary and of course there is certainly location preference (after all he is “MBA”).
But wait what he finds in real world? He is not doing the expected work but is simply googling data or making some report for some senior to make presentation and no one is asking his inputs for the company’s future strategy. And what happen to salary it’s not even 50% of what he was suppose to get. Location? ? Are you joking to ask such question in globalized world? Wait didn’t mention most important point he would have landed in wrong industry all together
So you can understand his state of mind. So what should one do? Someone told don’t worry till you are in “right bus” but here there seems to be no vehicle altogether.
Relax this is fact of life and most of people would have experienced the same. It’s called Murphy’s Law. I had read somewhere “career planning = career limiting” and most of us make this mistake. We make ourself too inflexible since we have planned career well from manager to CEO in some record time of 5-6 yrs. We have fixation to profile, industry to such an extent that even if we get better opportunity in other areas we turn blind eye to it. So my only learning is plan career with caveat its never going to be way you intended. Then you may ask y plan career? Simple answer to this is that everyone of us either make gymn schedule or study schedule or take new year resolution sometime or the other knowing fully that we have always failed to follow it but that doesn’t stop us from making them. Same is true with career planning.
This is how I have reconciled myself :).

2)People Management:-
Recollect your OB lectures when everyone was sleeping wondering why one has course such as this in their program. However after an MBA, in just few months one would realize that Kotler’s and Damodaran is of not much of use nor the Peffer’s ,Prahlads and Ghemavat. You don’t need to read “Talent is never enough” by John Maxwell since you experience it. You can see very talented MBA from best of Bschool reporting to someone who is hardly graduate and this fresh from B school starts complaining about company not being able to give its employee due worth. These examples help him to reinforce his belief that company has not given right profile/money. But the fact is intellectual capability is not of much importance if person cannot drive the behavior in organization. Best of strategies are of no use if they cannot be implemented. Sales manager who cannot motivate his team to achieve their target is of no use even if he has fool proof strategy. The same is true with all the other functions of business. Everyone has a supervisor and the other fact is everyone finds his/her supervisor as biggest fool on the Earth. Moreover this is true for fresh MBA who was taught “Managing with Power” and was never taught how to work without power. It’s very important to pursue ones viewpoint rather than reconciling to the belief that the other person is fool. It requires lot of courage, persuasion power, negotiation skill and understanding of OB to get one’s work done without “power”.

3)Don’t miss forest for trees:-
Completely frustrated MBA in wrong place under fool considers his work very trivial. He fails most of the time how this trivial work of his fits in bigger picture of the organization. This may be because he is too dejected that he doesn’t even want to put an effort to visualize the big picture. This is big trap and if one falls in it then it can act as a “tipping point” after which there would be steep descent in his career. So ensure you have big picture in mind and work towards it with hope that it would be rewarded and you would get better opportunities in future.

This has been my experiential learning till now. Some of the things I have experienced and some are my opinions/belief and its quite difficult for me to separate one from other.
Quite big and boring post and it’s in my interest to stop gyaan before I loose subscribers to my blogs.

Value based pricing ??????

I am just wondering how many theories backed by case study which you one learns in B-school have no relevance in real world. Or is it that I have not understood them properly so finding it difficult to relate to problems in corporate world or is it due to my inexperience. I sincerely wish that second reason should turn out to be true.

Value based pricing was one the most abused word in all my marketing lectures. Every professor would provide “gyaan” that customer is willing to pay upon the perceived value of the product/service and not based on the cost aspect. It is duty of the marketer to create this value perception. They told us it is difficult for company to move from cost based pricing to value based pricing. The examples of Pepsi, FMCG products etc were standard. So it became mantra for us that wherever we work we must ensure that gradually we adopt value based pricing by educating the customer. But in real life situation is totally different. Consider for example entire outsourcing industry which came to existence due to cost factor. Now Indian players as outsourcing center played cost card to their advantage and gain competitive edge over other MNC. As Indian players matured the cost of employees in India increased manifold though nothing compared to US and Europe still. Further the new cost centers like China, Brazil, and Philippines etc emerged. Also most of the MNC established there delivery center in India and such places and have removed cost as differentiator. In this given industry landscape, there is no doubt that service providers would enjoy benefit if they go for value based pricing. But how can one make transition to such pricing strategy when you are never sure whether other player would adopt such strategy or not. It could be serious loss of business if industry as whole does not adopt it. Further how do you educate customer when entire industry came to existence because of the cost arbitrage. What about the competition arising from other parts of the world? So here the service provider can only succeed if it is adopted industry wide. But that is very difficult to achieve in fragmented market where there are large number of players. So this is one more theory learnt in B-school which I have found it difficult to implement due to real world constraints. In fact I was wondering in this era of globalization where buyers are well educated and connected across the globe how difficult is to sustain value based pricing for players in other industry too?

So my marketing friends pour your views, counter arguments on this supported by as much “gas” as possible.

Derivatives in IT decision making

Doesn’t topic look strange? Yes I am referring to using derivatives in selecting IT solution. I haven’t got crazy working in IT industry after MBA finance but the fact is it relates. I read an amazing article from an analyst of Forrestor who had proposed this concept and I have highest respect for his knowledge and conceptual clarity of both the worlds – IT and Finance. So the credit for this post goes to him. I am trying in this post to explain my understanding of the report in simple words for benefit of non-IT guys.

Let me start with simple question – what does a business looks for from its IT? I know it may mean different to different businesses but in very crude terms we can say that IT must at very basic level facilitate the business to grow and thereby achieve its objective. Now the question for CIO is when business looks forward to IT for some solution to business problems he needs to select best from variety of alternatives available. This is very subjective since it has to take into consideration variety of constraints like budget, available skill set and future business outlook. But do all the necessary factors are factored in while making such decision? How is the cost-benefit done for each option? More often than not CIO would determine cost of implementation and the value of direct benefits from it and then select one which gives maximum value for given cost which should be within the budget. But is this the best way to take such decision? I will give simple example. Given business problem say introducing online shopping can be solved by solution A and solution B. Cost of solution A is say Rs 1 lakh while of solution B say 1.2 lakh which provides same functionality but with flexibility to add auction feature within a year. Now given above method of decision making CIO would select solution A since there is no way to factor the value of limited (time bounded) flexibility that solution B offers. So here if CIO is able to find the value of flexibility then he can make better decision. Then how to find its value?

The answer to this problem is call option from finance industry. This case is similar to concept of the call option which gives the buyer of the option a right to buy the underlying at strike price before expiry date of the option. Here also solution B offers CIO a right to implement auction functionality at certain determined cost within a year. The call options have value for the right they provide and similarly this flexibility should also have value. Call options price is found using Black Scholes option pricing formula:-

c= s*f(d1) –xe-rt f(d2)
d1={log(s/x) + (r + v2 /2)t}/v*sqrt(t)
d2 = d1 – v*sqrt(t)

where ,
s= price of underlying
x= strike price
r= risk free rate of interest
t= time duration for expiration of option
v = volatility for stock
f= standard normal cumulative distribution function.

We can use same formula to find value of the flexibility to make more informed decision since the concept is same. In our case

c= value of the flexibility provided
s= return on implementation of auction feature
x = cost of implementation of auction feature
t = 1 year here i.e. time available to avail the flexibility
v= volatility of industry can be used to predict volatility of business and hence technology usage.

So using this above option we can find value of this flexibility and that value can be deducted from option B to make it comparable with option A. This would enable better decision making for CIO than obvious methods that are used today. Further it provides him an opportunity to deliberate on future features that might be required and may facilitate him to provide more objective explanation to CFO for budgetary approval of flexible IT solution that may help business in longer term.
I know you may question lot of assumption like that of volatility and usage of normal distribution and most important the assumption made by Black-Scholes in pricing model etc. But this post is meant to bring to your knowledge entire new dimension of using the financial knowledge in IT decision making. We can always debate out the viewpoint and criticize the shortcoming of any model but at same time I think we should appreciate the new perspective.