Cross functional exposures and expertise - A must have for an organization

It has been observed that very few industry veterans/ CEOs prefer to hire people with expertise in an unrelated industry. This trend is somewhat changing though. A giant electronics company recently hired an ex FMCG veteran for a top job within the company. This makes one wonder about how should one decide on hiring especially for the top jobs within the company. Is it useful to have an industry veteran or is it good to have someone from an unrelated industry take up an important job within your company??

Essentially I believe that the following things need to be taken in to consideration before deciding if one should be hiring a person from within one's own industry or one should go for cross functional individual.

a. Company requirements & job description
Firstly, the need of the company in terms of the job description would play a crucial role in determination of whether the company and the role is open for a person with cross functional expertise. It is necessary to ensure that the job description is not looked upon with a myopic view but a wider dimension of the overall expectation from the candidate is taken into consideration. Many organizations tend to give more importance to routine tasks for a candidate taking up a role to decide on the job description thus reducing the opportunity to creatively look upon the positive impacts that a person can bring in.

b. Team composition
If there is a team who would be managing that role/ project/ task that the person is going to be appointed, it is always more beneficial to have at least 20% of the team to be composed of people with diverse experiences. This, one should remember not just works in a business school classroom, but also in every organization. It brings a fresh perspective and offers an opportunity to look at a business case with a diverse view. This would ensure that the team is better equipped to solve a business problem rather than having people with similar background giving the team a one dimensional approach.

c. Inter industry relationships
Seemingly unrelated industries tend to have a common thread. For example - Apple & Louis Vuitton, though they appear to have completely different businesses at first glance, there is a common element. Both tend to produce luxury goods and tend to target customers who are willing to pay a premium to own their products. So a person who has worked with Louis Vuitton may still find his expertise to be relevant for Apple.

d. Ability to bring a positive impact
As with most tasks / businesses, the primary thread is trying to find people who can bring an impact. So identifying a good resource is essentially about identifying the inherent capabilities of the person and his ability to positively influence one's business. Its essentially saying " Find good people (From your industry or different industry)- They will make it happen for you"

Online retail - A sunrise industry..Or A sunset business!

Go through any industry articles or job fairs or articles on business or Private equity websites...one thing which has created the highest buzz is  e-commerce / online retail. Here is a sneak peek into the industry and my views on it and how I feel that this industry is somehow going to spell doom to a lot of industries before eventually spelling its own doomsday.

A. Only industry which has not made money before getting sky rocketing valuations

Lets look at any industry in the world which was in a start-up phase. (Oil industry, Automobile, Engineering and construction or even services industry like IT, financial services etc.) Not even a single of the current biggest global industries currently started up with a business plan which would burn the pockets of their own investors without having any substantial revenues. Most of the e-commerce companies in India offer only a single value add - Lower prices !! That is essentially because they are burning their own cash. Its like, I buy something for 100 and then sell it for 85. Obviously, there will be a huge demand for it because I am myself making a loss to ensure that I get customers. No single industry which has survived since inception, has had such a business model. Look at any of the biggest companies across the world for that matter, all of these companies have serious revenues and operating profits not because of their cost competitiveness but because of their ability to cater to a certain market demand at a price which does not make them lose their own money. Funnily though, venture capitalists and private equity funders are going crazy assuming that they can sell it later to someone who is crazier!

B. Almost negligible revenues for some companies valued at a billion dollars

On one side of the spectrum are some giant e-commerce companies like flipkart, snapdeal or amazon who have few billion dollar revenues whereas on the other side there are a lot of e-commerce companies who have negligible revenues and are still commanding really huge valuations. The other day I was looking through zomato numbers - their revenues 30.6 crores (5 Million dollars) and operating loss 41 crores! wow...revenues lower than operating losses and the company commanding a valuation of nearly a billion dollars! Even a novice would say that this is absurd!

C. Huge overheads

Though these companies claim that they have lesser overheads in terms of store space etc, they have serious overheads in terms of employee compensation and rentals that they pay for their plush offices. Most of the employees in the middle and top management are grossly overpaid due to the huge amount of funding that they have got. Also most of these employees have little or no knowledge of the industry as the industry itself has just started building. An MBA employee with 2 years work experience in these companies would be paid at least 3 times higher salary than a 5 year work experience MBA at a company like L&T or Infosys.

D. Funny discounts vs spreads

Typically the spread between a retail outlet and an e-commerce website selling products is 5-7% considering the costs of real estate vs courier. This spread narrows when we move into tier 2 cities in India as the cost of real estate is lower whereas cost of courier remains almost the same. So an average of 5% lower prices is justifiable. Most of these websites offer 20% discounts and on some days even 40-60% discounts! Unjustifiable!

E. Retail killers

Their self destructive model is not just burning investor money but also killing a lot of smaller retail players who would not have deep pockets to keep burning such money. Hence some of them are already closing down and in time most of them would. Essentially this would not only lead to destruction of their own industry but also that of the traditional retailers.

F. Price sensitivity

The Indian consumer is very price sensitive. If for some reason, any of these e-commerce websites start commanding a premium for their services, there is zero switching cost to another retailer. That would mean that however hard they try, they will never be able to generate a loyal customer base. So the typical valuations which come from sales ratios or per customer numbers are all likely to go for a toss as soon as they try to command a premium.

G. Burning pockets

The pockets of these investors are burning rapidly and it would be soon that they would run out of cash. Most of these investors are able to survive currently due to perceived increase in valuations which would collapse as soon as the non sustainability of this business model becomes apparent.

H. Other stakeholders

A successful business not only generates revenue for itself but also for other stakeholders in the business. For example, TCS would not only make money but will also give solutions to their clients which would help them save/ make money. On the other hand, other stake holders in this business like the local vendors or sourcing agents in this business themselves are losing money thanks to seriously huge discounts they tend to offer. So it would soon run out of this support system too and would make it even more difficult for them to survive.

I. Not even operating profit

Not even a single company has been able to clock Net Profits in this industry. Forget Net Profits, they cant even have operating profits! Some companies are more than 5 year old and few are as old as 8-10 years! If they cant even clock operating profit, how will they ever get into net profit considering their ever increasing over heads. Had this industry been funded by debt rather than equity, all these companies would have filed for bankruptcy by now!

J. Market stagnation

The current size of Indian online retail is around 4.5 billion dollars compared to the total retail size of 500 billion. That is around 3%. Even in US which has higher internet penetration, more urbanization, greater net literacy, the online retail size is less than 2.5%. Considering that Indian retail industry penetration has exceeded US, it is likely that over a few years, the industry will go stagnant. Tier 2 and Tier 3 cities in India are less likely to be penetrated by them considering the above mentioned background about the real-estate vs courier cost spread.

Looking at the above factors, I feel that this bubble of valuations of e-commerce is likely to burst and with it, it would lead to serious crises in cash and credit markets considering the amount of investments that have gone into this black hole sucking cash at a rapid rate!

Great Business Management Practices

There is a lot of research about what makes a successful business manager / CEOs. Here is my perspective on some of the essential elements which are in grained in the personality of a successful business man/ business manager.

a. Strong work ethic

Practice what you preach not only applies to life but also to your work. A good business manager not only expects his employees to work hard for him but works harder than most of his employees. Generally, he would never cut corners to success and understands that anything less than 100% is not sufficient. They do not mind burning the midnight oil for their work and also ensure that they are highly disciplined about their work. To cut it short, they worship their work.

b. People management

People management is one skill which is required in all walks of life but more so in management of a business. A business manager not only manages his customers as well financiers but also his employees. It is almost impossible to find a successful business manager who is not good with people management. He has to communicate the right stuff to the right people at the right time in the right way. He needs to know how to keep his employees motivated and aligned to his goals. Besides, he should be able to delight all the other stake holders of his business to run it successfully.

c. Great listeners

Listening is a skill which needs special mention here. Listening is not just about actively hearing all the stake holders in your business and giving their views due consideration but also about trying to pick hints from the environment. A good listener listens to words as well as trends. He actively seeks information and acts upon it.

d. Amazing analysts

Successful business manager who constantly excel are always great analysts. They are able to analyze situations and trends and able to take decisions effectively to make the most of them. They can look at data/ information/ trends/ behaviors and come to the right conclusions on what is brewing. Besides, they can add the right ingredients to make the most of that condition and ensure that the business is able to capitalize on that opportunity.

e. Risk appetite

You cannot succeed at anything if you are not willing to take risk. Only those people who are willing to lose the sight of the shore can discover new lands. That doesn't mean one needs to keep taking risks every time. Businessmen have an acumen to be able to take calculated risk and have a plan to mitigate them if they don't pay off. 

Technology revolution - Gadgets which lost relevance in the past 10 years

Technology has moved over the past 10 years at such a frantic pace that there have been a lot of gadgets which were in during the late 90s have completely lost relevance and to say the least, got obsolete . Here is the list of top 5 gadgets which come to my mind.

a. The walkman/ Disc Man -
With the advent of I-pods as well other portable memory and music playing instruments including the mobile phones itself, the walkman has completely lost relevance for the consumer. Not only are they bulky but also they use technologies which itself have become obsolete like the cassettes / CDs.

b. Polaroid cameras/ Cameras with films -
With the advent of Digital cameras which can capture/ display/ save/ delete images at a click of button, traditional cameras which recorded them on a film have completely lost relevance. The advent of this technology spelled doom for the traditional cameras almost instantaneously.

c. DVDs / VCDS and Audio CDs
With pen drives/ Portable hard disk drives and cloud technologies available, DVDs and VCDs have already started losing relevance and its not long before they are likely to get obsolete.

d. Fax Machines
With E-mails and internet accessible easily across the globe, fax machines (which were once essential devices in any office) are no longer found in even those offices which have been slow to accept new technological trends.

e. Land Line telephones
Mobile phones can do everything that a land-line phone can do plus they have extra features which are way beyond the utility of a land line phone. Considering that, it is no surprise that land-line phones are losing market share at an alarming rate.

Investing & Contrarians

The million dollar question in investing is when is the right time to invest and when should one think about exiting. There are some theorists who say "Be greedy when others are cautious and be cautious when others are greedy." This is more of a contrarian way of investing. Then there is another school of thought which suggests "The trend is your friend." This is more of a buying when others are buying kind of strategy. The question which tends to be asked to most portfolio managers and investors almost every time they make an investment decision is which one is better.

From my personal investing experience, I feel the contrarian strategy works better for me which is - Invest when others are cautious.

Comparing with the other strategy mentioned above is as follows:

a. Invested at lower levels
The main advantage is that you will be invested at a lower level more often as you will be buying when the world is selling at much lower levels. Just for the recent example when the world was cautious about sub - prime crisis and worried about who much more it can spread and as a result how lower can equity prices fall, there were points when nifty (Indian benchmark index) hit 4000 levels and even lower. Investing at those levels would have meant that one is getting good stocks at good valuations. Also, with the global co-ordination of central banks and governments, more often than not, any major economic crisis would be controlled and so in such situations investing at lower levels makes a real good sense.

b. Value investing
The idea behind value investing is picking up good stocks at a good price and then staying investing in them for a very long time. Value investors tend to look for quality stocks at a good price. Picking stocks when others are trying to sell at lower prices gives one an opportunity to pick stocks at good prices. Value investors would rarely find a stock at good value when the markets are rallying.

c. Better risk/reward
Investing in stocks at lower levels gives one an opportunity of higher upside as compared to being invested at higher levels. So not just the risk is relatively lesser considering that quality stocks have a decent intrinsic value/ Book value, but also there is a possibility of greater reward compared to being invested when the up-trend has begun.

d. Trend need not always be your friend
Investing in a market which is going upwards need not always be a wise idea. As the trend may be upwards for a particular time duration. However, if you are a long term investor, you end up buying in the market at a higher price and when the trend reverses, since you are a long term investor, you will end up not booking a profit and hence would end up with a purchase at a very high price.

Timing the markets vs time in the market
There are people who believe that one should always try and time the market right. So one would enter only when a few criteria are satisfied. I believe, that the only thing one should look into when trying to invest in for the long term is the fundamentals of that economy in which one is investing. If those are in place and one sees a 20 year growth in it, then one should be invested. The second point in deciding is that one should look in for good valuation when investing. So buy when people say its time to be cautious and markets are making lows on a very long term chart.