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Thanks for dropping by. This site is all about what I usually read, browse or blog about and the weekend fun with movies & gadgets.

- Venkat

Exponential Organizations (by Salim Ismail)


This is one of the best business books that one could read about the band of next gen organizations – born for and thriving in the information economy.

So what exactly are exponential organizations (ExOs) and how do you spot them around us?

My simple explanation goes as follows – any organization that is growing at a scale and a speed that is way beyond its size is an exponential organization. Examples will illuminate this concept better. Think of AirBnB, Uber, TED, Bla Bla Car, GitHub and Tesla.

We are living in the middle of an information revolution that is fundamentally transforming every industry that we know of. And the best part is, we are just getting started.

Exponential organizations live and thrive on information. Once a business is digitized, it is ripe to be taken over by exponential organizations. Think of the hotel industry. It took years for established hotel chains to scale. The industry is disrupted once the information on spare guest rooms at homes is available on line. AirBnB was born and is now the biggest hotelier in the world.

Once an industry is digitized, the marginal costs of production and marketing are close to zero. Thirty years ago you needed GE or Coco Cola to reach a billion users. Today a kid in a garage can do. It took a silicon valley start-up about $15mn to start a business. Those costs have now fallen to $100K. A 150x impact. A 3D printer costed $40,000 in 2007. It now costs $100 to buy one – cheaper than my normal printer. Typical Fortune 500 firm took almost 20 years to reach $1bn market cap. Oculus Rift did that in less than 2 years in 2012. This list goes on. A traditional car company needed $3bn to bring a new model to the market. Local motors is doing that with $3 mn.

The greatest asset of the exponential organizations is their ability to harness ‘information’.

So how to exponential organizations scale so quickly. This is the best of the part of the book. It offers a framework and a rich set of examples.

First, most exponential organizations start with a Massive Transformation Purpose (MTP). And they define MTP that is outrageously ambitious. As a sample. Google’s MTP is “Organizing world’s information”.

They will then engage the external world, create extended organization to get staff on demand, build and cultivate community & crowd, create machine learning algorithms to process data, leverage external assets and actively engage users to retain loyalty.

To get the best from their external world, ExOs will then go about building rich set of interfaces to filter and match data, use real-time and adaptable dashboards to track metrics, experiment constantly using lean approach, provide unlimited but accountable autonomy to employees and leverage social technologies to collaborate better.

ExOs need to find that ideal business model that will offer users a sense of immediacy, personalize their offering, make the offering easy to use and accessible, provide guarantee of delivery, create patronage for users, and allow the users to find them easily.

This book is important to read, understand and find those business models are lurking around the corner that can destroy the companies we work for. Read reviews on amazon.

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Lessons from Warren Buffet’s Annual Letters – Part 3


This is third in the series of articles about my learnings from Warren Buffet’s annual letters to Berkshire Hathaway. Read Part 1 and Part 2 here.

Business Performance

  • It is comforting to be a in a business where some mistakes can be made yet satisfactory performance can be achieved as opposed to a few businesses where even good management will suffer
  • With a few exceptions, when a management with reputation for brilliance tackles a business with reputation for poor economics, it is the reputation of business that remains intact.
  • If there is excess production capacity in an industry, the prices tend to reflect operating costs rather than capital employed
  • The primary test of managerial economic performance is the achievement of a high earnings rate on equity economic capital without undue leverage and accounting gimmickry
  • be achieved by a business in order to produce real return to individual shareholders- increases dramatically with high rates of inflation, often making much corporate investment unwise.
  • The true test of a truly outstanding business :
    • business earnings must consistently increase in proportion to the increase in price levels without any addition of new capital
    • Ability to effect price increases even when the demand is flat with no fear of loss of market share
  • When pace of economic change is great, investors and managers should consistently revisit their historic business valuation yard sticks. When pace of change is slow, the same approach can be counter productive
  • Action on the liability side should be taken sometime independent of action on asset side
  • The profitability of a business is determined by
    • What its assets earn
    • What its liabilities cost
    • What is its utilization of leverage
  • A great economic franchise arises from a product or a service that is
    • Needed or desired
    • Thought by customers to have no close substitute
    • Not subjected to price regulation
  • Retailing is a tough business to be in. Retailers need to be smart day after day, when competition is close on heels and shoppers are beckoned by countless choices.
  • There are 3 kinds of businesses
    • Great Businesses with ever increasing stream of stable earnings with no need for incremental capital
    • Good Businesses with sound economics but require significant reinvestment of earnings
    • Bad Businesses that grow rapidly, require significant capital and lead to little or no money
  • Evaluate ‘Moat’ that a business has – a metaphor for the superiorities they possesses to make life difficult for competition

Management

  • Incentive plans should be
    • Tailored to the economics of specific business
    • Simple in character and easy to measure
    • Directly related to the daily activities of plan participants
  • Managers should run business as though
    • They own 100% of it
    • It is the only asset owned by them and their family
    • They can’t sell or merge it
  • In selecting a new director be guided by
    • Board members need to be owner oriented
    • Business savvy
    • Interested
    • Truly Independent
  • Rationality of managers is often taken over by institutional dynamics, which can often be misguided
  • When investing is new projects, it is important to measure if every $ invested generates more than a $ of value over a horizon. Earnings pressures can sometimes thwart good projects.
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Do we have Digital Monopolies?


Our world today is dominated by internet giants who hold sway over our daily routine. Google, Amazon, Facebook not only dominate a part of the internet, but hold such commanding market share that we could start calling them Digital Monopolies. Regulators certainly think they are monopolies, if we look at the recent anti-trust allegations in Europe against Google.

Yet the question beckons – can we really call them monopolies? Are internet giants abusing power just as brick-and-mortar monopolies do in the physical world?

The answer is not easy at it seems.

Digital monopolies certainly operate under different market conditions than their counterparts in the physical world.

  • Barriers to entry are a lot lower for anyone who wants to enter the market. It is not difficult to start a competing venture. You can think of Twitter or What’s App. Most start-ups focus on a niche opportunity and then grow that business with funding into larger market. Scale-up in the era of cloud computing is linear with little need for large upfront investments
  • There is really no lock-in that the internet giants force on their consumers. You have a choice to search on Yahoo or use MySpace
  • In the internet world, any long term competitive advantage is fleeting. Both Google and Facebook are under threat on a daily basis from a start-up in the garage next door
  • Most monopolies in the digital world have benefited the consumer a lot of more than the supplier. In fact today’s digital monopolies get little or no direct revenue from the consumers
  • They rely on network effects, both direct and indirect, that promote collaboration and mutually beneficial relationships.

So unlike monopolies of older era they do not seem to be directly abusing power. A few books indeed argue that monopolies are good in a few ways, in that they can afford large research budgets and can have really long term outlook. Companies operating in cut throat competition don’t have that luxury.

Yet, concerns remain about Digital Monopolies.

  • All internet giants own their space that is different than others. Google and Facebook have amassed huge piles of data about every bit of our daily routine intermingled with the digital world. Has data itself become a monopoly?
  • Digital monopolies could abuse their position in a different market that is not easily apparent to us. Both Google and Amazon have run into problems; Google with their advertisers and Amazon with their publishers
  • They can use their power of data mining technology and skills to enter new markets. Think of self-driving cars, Amazon e-books and so on.

So there is, after all, a case to regulate some parts of the internet space to ensure a fair play. The hardest thing is to know which part.

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Flying on a single engine with clueless pilots in rough weather


That blog title was an attempt to summarize the state of global economy today.

The global economy, for a while, is running on a single engine ; that is of US and UK. Euro zone is still struggling and one financial shock away from recession. Japan is  running out of fuel after an year of fiscal and monetary stimulus. Emerging markets’ growth rates have dropped sharply in the last few years.

It is not clear how long the global economy could fly on one engine.

The link between macro news, policy response and reaction from financial markets seems to have broken. Bad macro news is not leading to predictable policy responses. Financial markets are trying to second guess how the central banks or government will shape policy.

But the political will to take strong policy decisions has withered away with rising debt levels and alarming inequalities. The backlash against inequality could eventually add another bout of turbulence; policy inertia, or worse, bad policy decisions.

Now the pilots themselves – read politicians and central banks – seem to be polarized and paralyzed in their response to economic rough weathers. While the Fed ended QE program officially, there is no confirmation that it will stick to its stand. Meanwhile Japan started its own QE experiment, surprising markets.

The response of developed countries to their economic troubles, shows that monetary policy among the central banks of developed economies has decoupled from one another. But one thing appears to be common. Central banks are owning more and more of their government’s debt, offered at low or zero interest rates. Governments are addicted to that cheap debt.

We have a situation today without a precedent; one part of government owes a lot of money to another part of it. The day someone decides to cancel each other out, we will have a case of default.

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Lessons from Warren Buffet’s Annual Letters – Part 2


This is second in the series of articles about my learnings from Warren Buffet’s annual letters to Berkshire Hathaway. Read Part 1 here.

Investor Behavior

  • When investing, we need to view ourselves as business analysts, not as market analysts, macro-economic analysts, and not even as security analysts.
  • As ‘bandwagon investors’ join any party, they create their own  truth – for a while.
  • An investor’s performance is determined not by what they know but how realistically then can determine what they don’t know. Define your circle of competence and operate well within it
  • Be fearful when others are greedy and be greedy when others are fearful
  • An investor should couple good business judgment with ability to insulate his thoughts contagious market behavior
  • The most important motto when investing is to maintain ‘Margin of Safety’
  • Investors should calculate ‘look through earnings’ – underlying earnings attributable to the shares they hold in their portfolio. Investors should target high look through earnings 10 years from now, thus forcing themselves to think about long term business prospects

Retained Earnings & Stock Splits

  • If a fine business is selling in market at lower than intrinsic value, the most profitable use of retained earnings is repurchase of its own shares
  • The value of retained earnings to owners of that business are determined by how effectively those earnings are used. Business should generate at least $1 of market value for every $1 of retained earnings
  • When the stock of a company is split or any other such action is taken, focusing more on stock price than business value, then the entering class of buyers are inferior to existing class of buyers
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Lessons from Warren Buffet’s Annual Letters – Part 1


This is the first in the series of articles about my learnings from Warren Buffet’s annual letters to shareholders of Berkshire Hathaway. The greatness of this man is in distilling his worldly wisdom in investing into simple sentences that an average investor can understand.

His annual reports, starting from 1965 to 2013, are a classic 101 to a wide range of topics. Along the way, the book value of Berkshire Hathaway, a close proxy of intrinsic business value as per Buffet, has grown from $19 in 1965 to $134,973 today. The compounded annual return of 19.7% over a period of 48 years is an astounding testimony to the investing acumen of Warren Buffet and Charlie Munger.

You will be disappointed to note that the points below are not meant to make us a great investor overnight. They are there to serve as guiding posts for a boat in a rough sea, so one doesn’t hit icebergs while investing.

Here we go.

Equity and Bond Investments

  • The goal of Berkshire is to maximize average annual rate of gain in intrinsic business value on per share basis. The firm will reach this goal by directly owning a diversified group of businesses that generate cash and generate above-average Return of Capital
  • Equity investments are heavily concentrated in a few companies which are selected based on
    • Favorable long term economic characteristics
    • Competent and honest management
    • Purchase price attractive when measured against the yardstick of value to private owner
    • An Industry with which we are familiar whose long term economic characteristics are easy to judge
  • When buying securities in stock market with a long horizon, the criteria are no different than buying whole companies. When such criteria is maintained the investment is over a very long horizon. Stock market fluctuations are of little importance as what matters is business performance
  • The only yard stick that matters over a long horizon is Return on Equity that a private owner of the firm can expect. To test economic performance, a five-year yard stick is a must
  • Treat Bond investments as unusual sort of business with option to retain earnings and grow capital
  • Cash flow is a meaningful measure of performance for a company with large initial outlay and very small outlay thereafter, such as a bridge or gas field owner. But for most companies needing cash to sustain business growth, this measure is meaningless.
  • A fast changing industry environment can offer high returns but precludes the certainty that investor seeks
  • Beware of companies displaying
    • Weak accounting principles
    • Untrustworthy management
    • Trumpeting earning projections
  • A dividend policy should always be clear, consistent and rational. If this principle is not followed by the company, be wary.
  • The term is ‘value investing’ is redundant. For, low p/e or dividend yield is not a true measure of market value by itself
  • Market is frequently efficient and not always efficient. The difference between the propositions is night and day for an investor. Over a long horizon, understanding this difference is essential.
  • Portfolio concentration can even sometimes reduce risk if the investor can think intensely about those businesses and has comfort level with the economic characteristics
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Banking on Agility : Have you got it right?


A blog post from me on Wipro website about the emergence of Business Operations Platforms in Banking & Financial Services.

Banks, driven by complex business environment and uncertain regulatory framework are moving their processes on to rule-driven, configurable and flexible business process platforms. The trend is going to catch up in 2015 and beyond in areas that have never been on the radar so far.

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Platform Thinking


Networked platforms are changing the game in a way that has never been imagined before.

In a simple sense, a networked platform, brings the consumers and suppliers of services or content together to transact business or exchange ideas.

Platforms – as compared to traditional e-commerce sites – go a step further. They build a complete ecosystem around the service being offered and the consumers of the platform often become the contributors.

Wikipedia is a good example of that. Airbnb has now the taken the hotel industry by storm.

As the author mentions, all the platforms in their nascent stage have a common problem. They struggle to maintain quality as they do not actually own the inventory.

But successful platforms build a strong curative mechanisms through social signals to enforce quality. A simple rating system for an author on Wikipedia or an apartment on Airbnb is one such mechanism.

Over a period of time, successful platforms move up the value chain and disrupt the traditional incumbents in the industry. They reach reliability and scale around the same time through increased adoption as the quality of the platform improves.

The irony is, it happens even when those incumbents are innovating themselves. It is just that the incumbent players never regard the new platform entrants as serious competition.

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The 15 years of Google


Interesting graphic that depicts the evolution of Google and its business model since 1997. In many ways, Google defined what internet is and yet it evolved quickly with what the internet came to be today.

We take many things for granted today when we open a browser.

When we search we expect to find most relevant results on top. One can calculate and do conversions directly in the browser. It also became our dictionary. We can check flight status, movie tickets, stock quotes, weather and many things more. Of course all these were available always on the internet. It it is just that Google made it that much easier to access.

No doubt there are many failed products from Google, but that is part of the process of innovation. Every year since it registered Google.com in 1997, the company managed to turn out block buster products. Year after year. Under a myriad of product launches, there is one simple unifying theme. People love to search and want to find what they need.

It will not be surprising if we see a very different Google another 15 years from now. For, that is what internet is.

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Battle of ideas on India’s future


In the midst of our economic woes in India, two of the world’s leading economists are debating on what the India’s future economic growth model should be. Amartya Sen and Jagadish Bhagwati are two of the eminent economists that India has ever produced. Both have a different point of view on the path that India should take in its quest for sustainable growth.

The debate of growth vs redistribution is simple, but it has nuances of all the economic theories ever put forth, from Adam Smith to John Keynes. Should India pursue growth at all costs and let the economics take care of lifting people out of poverty? (or) should India address social issues and income inequalities first which will pave way for sustainable growth.

If we see the competing economic ideas at national levels and political level involving India, they will more or less fall into these debates, be it China vs India or Modi vs Rahul.

Amartya Sen, argues for “inclusive growth” and questions how India will grow if its children or not fed, poorly educated and women die regularly while giving birth. An Uncertain Glory: India and its Contradictions, the book he co-authored, argues that India should fix public health, education, food security which will in turn drive the growth.

Jagadish Bhagwati, argues for a growth-led-development, and urges India to reach higher growth rate which will in-turn alleviate poverty. In the book that he co-authored,Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries, he roots for growth as a solution to all of India’s problems.

Unfortunately, both theories are based on assumptions that are not easy to apply universally in a complex and diverse country like India.

“Inclusiveness” theory assumes good governance, capacity of the state to identify and reach out to the needy and offer the right entitlements. Aadhar from Indian government is trying to achieve this, however our past record in public distribution is dismal.

“Growth matters” theory brushes aside corruption, marginalized social groups and deep rooted inequality in the society. Capitalism in its classical form could bypass the poor and illiterate. A brilliant article argues with data how this is already happening in India. We only have to look at China to understand that a blind pursuit of growth could lead to ticking social time bomb.

My personal take is these are not competing ideas but competing milestones in economic growth. It is not either-or, but rather how to sequence them or juxtapose them while maintaining a balance. As always in India there is no one answer.

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