GlobalGyan Blog

In an earlier post, we looked at how network orchestrators like Uber, Zomato and Facebook see exponential increase in connections as they add more participants. There is clearly tremendous value in being a first mover and growing market share rapidly, even at the cost of reasonable business economics. Yet, we also see that none of the networks are really unique – every platform idea has spawned several other copy-cats. Most of the markets are still nascent and have a lot of room for growth, so everyone believes they have a chance at success. Moreover, given the asset-light model of network orchestrators, there are no real entry barriers for a me-too product.

This absence of competitive advantage is emphasized by the apparent lack of any platform loyalty by network participants. For instance, most customers of ride-sharing services have downloaded more than one app on their phones; likewise, many drivers have signed up to two or more networks. Availability and price seem to determine choice for both sides of the network. A similar situation of bargain-seeking can be seen in e-commerce and real-estate marketplaces.

As long as the role of the platform is to just aggregate and enable discovery of supply and demand (at no cost to either), there is limited stickiness. The next platform with a slightly lower price or transaction fee will churn traffic to its network. In an extreme but plausible scenario, why wouldn’t the network participants try to disintermediate the platforms? On several occasions, drivers of the ride-sharing networks pass along their business cards, asking to be contacted directly. What would stop the customer from saving a bunch of phone numbers for the promise of a lower price?

Essentially, how do these platforms add value beyond discovery and aggregation? Let us discuss two major sources of value and differentiation that appear to be working for the successful platforms.

Information

Every time a transaction occurs in the network, the platform gains valuable information that can be used to predict future demand / behavior. A taxi network that has analyzed demand / supply patterns can help its driver partners to locate themselves at specific locations that increase the chances of being hailed quickly. The network can ensure that all the drivers do not land up at the most obvious hotspots (e.g. airports) even as customers are waiting elsewhere. Not only does this help the drivers increase capacity utilization, but customers also benefit from faster access to rides. In fact, surge pricing reflects inefficiency in network planning (matching of demand to supply).

The principle would apply to any of the network businesses. E-retailers can plan inventory and logistics better, even as they offer valuable suggestions to customers on what else they might buy. A social network would be able to match people with other people, and people with advertisers much better.

Valuable insights about the network can create improved efficiency on the supply side, and customized access and experience on the demand side.

Risk Management

Any interaction or transaction carries an inherent risk of something going wrong. When it is done bilaterally, each party builds in safeguards to mitigate risk, thus creating inefficiency. If I were to book a cab, I would ask the driver to reach at least half an hour early because I am worried (based on previous experiences) that he would be late. It is inefficient for both of us – the taxi remains unproductive for that time and I might have to pay some waiting charges. Or we mitigate risks by purchasing from well-known sellers (brands) because they offer an assurance of quality. We could have bought a shirt directly, at a lower price, from the contract manufacturer who actually made the branded shirt.

The network platform, as a third-party intermediary, can take on the responsibility of efficiently mitigating our risk, partly through the information it collects and partly through its own due-diligence. By providing an estimated time of arrival (using location information of the driver and rider), the taxi app gives an assurance of availability. By collecting user feedback ratings, the network builds a self-correcting mechanism of quality. Through physical due-diligence (e.g. supplier verification), and standing guarantee to the fulfilment of the transaction, the platform mitigates risk for all parties involved.

Assurance of fulfilment, timeliness and quality by the platform can reduce transaction anxiety and increase stickiness amongst network participants   

There is an Uber of something for almost every industry now. Actually, there are many of them. What will differentiate a successful platform from yet another copy-cat is the ability to use information effectively and efficiently to derive meaningful insights and reduce transaction anxiety.

(This was first published at DNA on October 20, 2015.)

Everywhere you look, there’s an Uber for something nowadays, whether it is healthcare or heavy equipment. The tremendous excitement about companies termed as Network Orchestrators makes one wonder if a dramatic discovery has been in the world of business.

Platforms like Uber or Ola connect drivers with riders and takes a share of the transaction value. Zomato or Foursquare connect restaurants with customers through an exchange of information (menus, photos, reviews, etc.); as they add advertising or delivery transactions, the platforms make money through revenue share. Similarly, Facebook and Twitter connect people with other people or businesses through information; revenue is made through advertising or transactions.  

In essence, network orchestrators enable ‘buyers’ and ‘sellers’ to discover and transact with each other. Most of these companies are rather asset light and their intrinsic value is a function of the number of participants in the network. If you were the only person on Facebook, zero connections would be made. Two persons would create one connection, three persons three connections, and six connections would be possible with four persons. A network of “n” participants gives rise to (n²-n)/2 connections, i.e. the number of transactions is an exponential function of the number of participants. While traditional business models grow linearly when their customer numbers increase, networks grow exponentially when their participants increase.

However, the idea of networks is not new. They have been around for centuries. We can seem them all around us. Financial exchanges are networks that connect buyers and sellers of shares; telecom networks connect speakers with listeners; banks connect depositors and borrowers; and shopping malls connect stores with shoppers. Brokers, whether they be of real-estate, wedding, or acquisition deals, have been around for a while too. Someone jokingly said that Sage Narada from Indian mythology ran the first information network.

So, what is all the excitement about? Why is there so much hype now about network models, and more importantly, such high valuations chasing them? There are three major reasons:

First, technology – a combination of the Internet, mobility and location-tracking – is enabling unprecedented scale to the networks. A real-estate broker was constrained by her time and also the localities which she could cover; an online brokerage has no such limitations. A retail store has constraints of time, location and (physical) space; an e-commerce site has no such issues. The use of technology and automation enables each platform to potentially reach every human being who can theoretically be targeted for that product or service; consequently, value increases exponentially.

Second, networks are being discovered in industries that were not seen as “network-friendly.” For instance, the automobile business was not considered a technology business; however, Uber is playing on the emerging mindset that customers do not need cars, they need a transportation service. Most “traditional” businesses probably have network models hidden in them, the orchestrators are just creating more efficiency and customer satisfaction, thereby taking significant market share away from incumbents.

Third, many of the traditional network businesses lost sight of their core operating model somewhere along the way. Banks, for instance, became asset heavy with lots of branches, systems and people; they are no longer efficiently connecting savings and loans. Similarly, many telecom operators moved to asset based, monthly rental models from transaction led, per minute pricing. This has given an opportunity for new-age players to build more efficient networks. Lending Club, anonline marketplace for peer lending connects depositors and borrowers at a fraction of the cost of traditional banks. Internet-based telephony and messaging company, Whatsapp which rides on others’ telecom infrastructure and provides free services, has 800 million active users, more than any mobile operator in the world.

Network business models are not new; neither are they technology businesses. The most successful of them use technology to accelerate their growth, discover hidden networks in traditional industries and create highly efficient, asset-light business models. Every company can gain from network business models; they just need to know where to look.

(This was first published at DNA on October 10, 2015.)

Nearly two years ago while watching the Indian super-hero movie (Krrish 3), I couldn't help but feel sad that Bollywood movie-makers weren't thinking big enough. I had suggested that if 100-million middle class Indians spent $1 each, a movie could garner Rs 600 crore ($100 million then) -- at that time, Krrish 3 had become the second-highest grossing Indian movie with just Rs 250 crore.

This year, Baahubali crossed Rs 500 crore in India collections, the only movie to do so.  

Let's take this Rs 500 crore number. Assuming an average ticket price of Rs 100 (using a 25:75 split between multiplexes and single screen theatres), it means 50 million tickets sold. Anecdotal evidence (including my own behaviour) suggests that many people watched the movie 2-3 (or more) times. That would mean fewer than 50 million unique viewers, perhaps 30 million or so. Imagine... the most successful Indian movies have less than 3% market penetration! Even if we considered the 140 million cable/DTH (subscription TV) households as the addressable market based on affordability, we are looking at a 5% penetration.

On the other hand, in the US market, a highly successful movie like the Avengers grossed upwards of $600mn, translating into about 75 million tickets sold (at just over $8 per ticket). As such, the ticket numbers (75mn in USA vs. 50mn in India) don't look very different but given the vastly different denominators (population: 319mn vs. 1267mn), one would expect much larger numbers here. 

There are probably two major reasons why Indian movies have such low penetration:

1. Content is not universally acceptable. Even in a highly fragmented market such as cinema, it is tough to believe that the most successful product appeals to just 5% of the market. Different languages spoken in India adds to the challenge. Just 45% of the population knows Hindi, thus ruling out the most popular Bollywood movies to a majority of the market. 

2. Reach of cinemas is still very low. India has 9000 cinema screens, giving it a density of just 8 per a million population. On the other hand, the US has 117! Therefore, even if a good movie with universal appeal were to be made, access would still be a huge issue. Obviously, cable & satellite TV has much greater reach but far less monetization (on an average about Rs 50 crore per movie). Further, most Indian movies have also not been very creative or aggressive in the after-movie market of accessories, merchandising and digital content/games. 

On the first factor, Baahubali has made an interesting beginning* by releasing Hindi, Telugu, Tamil and Malayalam versions simultaneously, thus addressing over 60% of the market. Even the theme - an Indian super-hero movie on the lines of popular mythology / historical stories - probably had wider appeal. The cast included well-known stars from the southern states; if there had been a recognized Bollywood star, I guess the Hindi version would have done much better. This could hold the formula for future, large budget Indian movies: 

* Stories that can connect across cultural groups (fantasy / mythology / patriotism / kids)

* Dubbed simultaneously in all major languages (Hindi, Telugu, Tamil, Bengali, Marathi, Gujarati, Malayalam... would hit almost 75%)

* Multi-starrers with leading actors/actresses from various regions

On the second factor, it would be interesting to see if Baahubali can revive an interest (and value) of TV rights for a movie. There hasn't been much to see on the merchandising front too.

The profits from the first Baahubali should give its makers (and other producers) the confidence to push the boundaries next year. It would be exciting to see an Indian movie cross Rs 1000 crores ($150mn now) in revenues soon. There, that's the new target!

(* Other movies like Roja, Robot and Bombay were also released in multiple languages earlier. Baahubali is the only one amongst the all-time box office leaders.) 

Anyone who has taken Gallup's Q12 employee engagement survey would have recognised that this post is about the most controversial question of the twelve. Employees are required to rate, on a 5-point scale, if they have a best friend at their work place. Most respondents read this question literally and reply that their "real" best friends are not their colleagues. Some others question the relevance of such a question and seek to keep their personal lives separate from the professional.

In fact, I recall this NYT article about the difficulty of making new friends once you are in the thirties and forties. A subsequent discussion about this article with several colleagues revealed that there could be a western / eastern divide on this topic. For instance, in India, the workplace is often a seamless extension of the personal space / family. Many Indian organisations refer to themselves as families. On the other hand, the (typical) western view of a job is led by the employment contract. (As always exceptions exist.)

But this post is not really to discuss the Gallup survey or west/east divides. It is about friends. And some reflections on the topic during my 24 months out of a workplace.

Many of us, over the course of our careers, give all our time to our job. This comes at the cost of our personal relationships, including a connection with the self. As we jump from one role to another and hop from one airport to the next, friends and family take a hit. Somehow, due to greater proximity and responsibilities, we might keep the family ties alive but friends from yester-years (childhood, school/college, first job) are forgotten. Yes, Facebook might remind us of their birthdays and a Whatsapp group creates an illusion of fun and conversation but the connect is lost.

Meanwhile, we build new relationships with colleagues and others whom we meet in the context of work. Or parents of our kids' friends. Yet, very few of them rise to the best friend category. The NYT article mentions three conditions that are essential to creating friendships: proximity, repeated/unplanned interactions, and a setting that enables people to confide in each other. I believe that the first two conditions are enablers whereas the third seals the bond. That's the reason friends from childhood (age of innocence) or hostel life (high level of dependence on each other) are often in the BFF category. On the other hand, even as corporate relationships provide opportunities for meeting frequently, most organization cultures (or politics) prevent the confiding from happening.

So we end up with this set of highly transactional relationships with colleagues. Meanwhile, lack of proximity and/or repeated interactions with our original best friends weakens the bond of trust. When we change jobs, new work relationships replace the old ones, and the illusion of company continues. The hollow nature of such existence is most felt when we quit a job for a solo gig (like I did)... there may be no 'workplace' nor are we surrounded by constant emails and meetings that have come to define our social life.

I was fortunate that some of my work relationships did turn into good friendships - perhaps it was the challenging journey at Tata Communications or it was just a coincidence. Even though we lived in different cities/countries, work created sufficient opportunities to meet frequently; shared passions (like gadgets and innovation) and values (like humility and respect) helped transcend age / hierarchy barriers. Now, we meet less often... will this also go the school/college friend way?

The last two years have taught me a lot about relationships, in both professional and personal lives. The achievements that we care about so much - grades or earnings or deals concluded or goals overachieved - matter very little beyond the immediate. People stay in touch (or not) because of their experience of who I was as a person. My former colleagues might have all but forgotten what I did at the company for ten years; however, they probably have a vivid recollection of how I made them feel during our interactions. 

Take a minute to answer these (or any similar) questions:

When was the last time you went on an impromptu road-trip with your school friends?

When was the last time you surprised your parents (or grand-parents) with an unplanned visit?

When was the last time you cuddled with your spouse on a weekday because the weather was such?

When was the last time you began (and continued) a new hobby?

If you cannot remember the answer, note that your friends & family cannot too.

It is not possible to turn the clock back on what we did or didn't do in the past. But we can surely work on the present and future. We must change the way we measure our life and (re-)allocate our resources accordingly. Now, pick up that phone...

Referencing John Gruber's post on Working Backwards to the Technology.

This is a wonderful story about the core of Apple / Jobs' philosophy. The post quotes from a 1997 video of Steve Jobs, soon after he returned to Apple and started to change its strategy:

Jobs:

What about OpenDoc? What about it? [Audience laughs.] It’s dead, right? Let me say something that’s sort of generic. I know some of you spent a lot of time working on stuff that we put a bullet in the head of. I apologize. I feel your pain. But Apple suffered for several years from lousy engineering management. I have to say it. And there were people that were going off in 18 different directions doing arguably interesting things in each one of them. Good engineers — lousy management. And what happened was you look at the farm that’s been created with all these different animals going in different directions and it doesn’t add up. The total is less than the sum of the parts.

And so we had to decide, what are the fundamental directions we’re going in? And what makes sense and what doesn’t? And there were a bunch of things that didn’t. And microcosmically they might have made sense; macrocosmically they made no sense. And you know, the hardest thing is… you think about focusing, right? You think, “Well, focusing is saying yes”. No, focusing is about saying no. Focusing is about saying no. And you’ve got to say no, no, no. When you say no, you piss off people.

Everyone who wants to understand strategy should know this. Focus (or choices) is really about saying No. Particularly when there are so many things that one can possibly do (or one is already doing). Even at the cost of pissing off some people.

And if you click on the link at the end of that post, you will come up with this Apple video. Almost every company has a vision, mission, values statements typed out on posters and screen-savers, but unfortunately, their employees or other stakeholders don't know what it means. But this video, in 90 seconds, tells all of us what Apple stands for.

Recently I realized that the number of Indian Institutes of Management (IIMs) has grown to 13 from about 6 at the turn of the century. And there have been discussions about creating more IIMs, one for every state (that will take the count to 29). I was at an IIM last week chatting with some faculty members and we felt that the biggest constraint (amongst several) in creating these new IIMs will be the absence of good quality faculty.

The number of management PhDs being awarded every year must be rather small, a few dozen I suspect, with probably just a dozen or so coming from the original, more established IIMs. So how do you staff all these new institutes, how do you attract good teachers to move to non-metro / smaller town locations across the country (where the new IIMs are likely to be set up)?

It would be unreasonable to believe that you could suddenly attract many young MBAs to take up a regular PhD program, particularly with its 4-6 year cycle time. At the same time, you cannot teach an MBA program with mostly (corporate) guest faculty who have not received any academic teaching skills. The middle ground could be as follows:

The (first 6) IIMs should create a new 1-year faculty development program aimed at professionals with at least 10 years managerial work experience. Like the Post-graduate Diploma (instead of MBA) that they offer at the graduate level, this could be called the Doctoral Diploma or something similar. This 1-year full time program could consist of a quick overview of the MBA program (like a 3-month management development program), learning and teaching skills (including case teaching methodology), basics of research methodology, a few electives in the chosen area of specialization and an internship (teaching an MBA elective as an under-study). 

Would many professionals be interested in such a program? I don't know for sure but it can be easily tested. It is anecdotal, but there are already many who are teaching on a part-time basis and may be willing to explore full-time teaching positions. Also, even those that are teaching as visiting / guest faculty could benefit significantly from such a program. 

Also, the Government (or the UGC or the IIMs, whoever makes those rules) should treat this Diploma as an entry-level equivalent of a PhD; subsequent promotions / raises should anyway be based on teaching, research and consulting performance.

The best researchers and academicians may still come from the (Indian & overseas) PhDs but this approach will ensure that we have adequate, good quality people standing up to teach the thousands of students who will be signing up at these new IIMs.

More thoughts about the management education space, as I spend more time understanding it, soon.

It's one of the biggest technology deals of recent times and there's some worry if we are seeing a repeat of the late 90s dot-com bust. (Remember, many of the 20-something old entrepreneurs were at school then and probably don't have any recollections of that euphoria and bust.)

First, about the valuation. We all know there's really no foolproof, scientific method to value many businesses, particularly in the hi-tech / nextgen space. Like art, it is often in the eye of the beholder. The best way to evaluate a valuation is to to see the most critical assumptions that one has to believe in. Let us peel it down...

Facebook has a Enterprise Value to Revenue ratio of nearly 20. In case of Google, which is obviously more mature than FB, the ratio is about 6. So, to justify the Whatsapp (WA) valuation, first of all we would need to believe that it could generate revenues of $1 - 3 Billion. Is that possible?

WA has 450mn active users and is likely to add a few hundred million new users annually. Is it reasonable to believe that it could touch 1bn users in a couple of years? Smartphone numbers are estimated to be 1.75Bn in 2014, perhaps 3bn by 2017. Can WA achieve 30% penetration? Likely. Remember, already Facebook has nearly a billion mobile users.

So, with a billion user base, WA would have to generate $1-3 per user per annum. Is that inconceivable? No, that's just about Rs 10 per month: all those forwarded jokes are worth that much, right?

Strategically, buying WA makes a lot of sense for FB. As Rene Ritchie points out, Facebook's primary business is to catch our attention (and subsequently monetize it). It was clear that people were spending a lot of time on Whatsapp; most private and small group conversations had moved there and probably FB Messenger was not having the desired impact. WA was multi-platform and easy to use (no login; no "adding"). FB cannot let people's attention wander away from any of its products; so it bought out a competitor.

Then what could go wrong?

For starters, the valuation multiples we started with could be too optimistic. Compared to other, "traditional" technology companies (Apple, IBM, Microsoft, AT&T -- their EV to Revenue ratio is 2 to 3 times), FB appears overvalued, probably Google too. So, if you took a 2X multiple, WA would have to generate $9 per user per annum, which is obviously tougher than $1-3.

The bigger issue is about the monetization strategy. Will a billion people pay a buck every year to keep Whatsapp or will they move to the next free messaging app? What caused it grow exponentially (no login, no "adding") could also be its weakness - mobile number based connections can be replicated on any other app almost as easily. Whatsapp groups will need to be recreated by the admins and profiles will need to be updated but don't underestimate the effort people are willing to put in to save a buck! As several hundred millions come up for their first payment shortly, WA will need to justify why it is better than many other multi-platform, free messaging apps (including BBM which still has many dedicated fans). And of course, the fear of advertising always lurks around the corner.

Overall, I believe it is a good, strategic move by Facebook. By paying only $4Bn (20%) in cash, and the rest through stock, FB has used its highly valued stock to make this risky move. Not only have they purchased a potential billion-dollar revenue product, they have also gained control over a major competitor that somebody else could have acquired. 

Almost all the reviews of Krrish 3 that I read before watching the movie warned me against going anywhere close to it. But when has logic ever prevailed, particularly when it comes to kids. And I must admit, I had enjoyed the first two installments of this trilogy.

Since then I have been wondering if Krrish 3 (K3 henceforth; I cannot get myself to type that double-r again!) was a good movie or not. Most kids seem to enjoy it a lot and hardly anybody walked out of the theatre during the movie. It is now reported that K3 has crossed Rs 250 crore revenues in the two weeks since release, making it one of the most successful Bollywood movies ever.

This is not a review of the movie, although I must point out what I found most jarring. There is no conflict between the two personas of the super-hero. Only the mask and black raincoat separate Krishna and Krrish; in fact, you see Krishna dancing and singing around a statue of himself. Contrast that with other super-heros like Spiderman, Batman or Iron Man... they are all reluctant "heroes" often unable to reconcile between their 'split' personalities. Not just them, eventheir loved ones go through similar struggles. This, I believe, creates palpable tension in their stories, often stronger than their conflict with the villain. 

On the other hand, in Krrish's favor, his story is an emerging one. He does not have years of comic stories, back-stories, make-overs or reboots available. He is a super-hero created for movies (nay, Hrithik Roshan), one movie at a time. Maybe Marvel or better still, India Book House could adopt Krrish and make a real comic super-hero series out of him. 

Anyway... the other issue that caught my attention was the relatively small scale of Bollywood movies. A 250 crore collection has made K3 the 2nd most successful in the industry. The Avengers (similar genre, Hollywood's 3rd highest grosser ever) had a budget 5X of K3 and earnings were 37 times more! In India itself, The Avengers earned Rs 65 crore. As pointed out in this article, the pertinent question is why Indian film-makers have no apparent desire to tap the much larger movie markets overseas.

In many industries, Indian companies have globalized, even when the Indian market was big enough (& growing), so that they might become globally competitive. Recognizing that products and brands from overseas have access to Indian markets, we needed to be able to compete with them in our home turf. And of course, many industries enjoy economies of scale and increasing the addressable market is a means to improving margins. Very high fixed cost businesses like movies clearly lend themselves to 'market expansion'.

Of course, as with any cross-border expansion, you cannot just transport products across markets. With movies, it is indeed tough to "customize" the product for each culture / language that one targets; at most you can dub the movie and maybe, edit it slightly differently. At the same time, the success of Hollywood movies like The Avengers or The Avatar has shown that good quality entertainment and story-telling is universally accepted. 

So are Indian film-makers shortsighted, focusing on the 100-200 crore collections whereas much larger opportunities lie elsewhere. Will the increasing corporatisation of Bollywood lead to larger scale movies being made in India, by Indians for global movie markets? In fact, a Bollywood movie with pan-India appeal that can earn $1 from each of the so-called 100mn middle class Indias has a Rs 600 crore potential!

We are in the middle of our strategy planning process, an exercise that involves at least a hundred, if not more, managers across the company. For any organization, this process is a huge investment: thousands of man-hours, travel, external advisers, etc. The goal, of course, is to create the document that will guide the company's future, *the strategic plan*.

Too much emphasis, unfortunately, is placed on writing a document. Corporate planning departments work with the top management to show off their excel and powerpoint skills Many companies outsource the work to consultants so that the best, most comprehensive plan can be written. In most cases, nobody looks at the document after it is "approved" and bound.

For me, the value of the strategy planning process is not in its outcome but in the process itself. Getting managers across departments and levels to participate in asking the right questions and debating possible answers is invaluable. As we concluded a recent strategy workshop, the overwhelming feedback was, "wish we spent more time discussing these issues in such cross-functional groups". 

Given how the world is changing around us, a "plan" is outdated the day it is finalised. What won't be outdated is the thought-process that went into it. Having your mangers share a common understanding of the market, your choices and actions is a powerful advantage because they are now equipped to make changes as the underlying assumptions change. A plan written by the corporate planning team or consultants does not lend itself to dynamic modification.

Make the strategic planning process a key element of your leadership / mangement practice. In fact, consider making it an ongoing activity, part of your monthly conversations. Democratise your strategic plan.

(Later: The top 3 strategy questions every manager should think about daily.)