Differentiation, Positioning, and Innovation.

Do you know the company that makes ‘long lasting’ alkaline batteries? Can you tell me the toothbrush company who are the ‘dental professionals’ and came out with the first indicator toothbrush? Could you recollect the ‘shockproof’ electrical appliances brand? Call it Duracell, Oral-B and Havells. That’s the power of differentiation. It is like an orange cap holder in a cricket field –crying out for attention and easily recognized.

There are many brands in alkaline battery industry, many toothbrush companies and quite a few electrical appliances brand. But the above three brands stand out! Because, they managed to clearly differentiate their product and offering to the customer. Now in India, I think there are too many brands in a product category offering the same benefits and communicating the same message, thereby causing too much clutter in the market place. The me-too products! You can watch for them whenever you shop in malls and retail outlets next time. It can also be attributed to lack of innovation in product and marketing strategies or just the drive to create innovation in products.

It pays off, when a brand can take just the opposite position to competitors offering. It can be the easiest route to differentiation. In the earlier decade, mobile phone companies were positioning their products as small and sleek. Later, everyone started speaking about large screen mobile phones. Hotels always spoke about comfort and luxury until Ginger came out with self-service chain of hotels. I am not saying it works always. At the worst case, it works when the ultimate benefit of the service/product is unchanged and the frills surrounding it are altered to create an innovation.

Taking an opposite position works only in certain situations. We cannot think of largest computer, an odorless soap, or lather less shaving cream at this point of time atleast. But, a position that is unique and new to the industry is important. There can be so many product varieties to serve so many likes of thousands of customers. After all, everyone has different likes. So, just creating flavors or varieties alone can lead to an enormous amount of differentiation in market. But, this, ‘variety technique’ is a low hanging fruit of to create differentiation. Imagine, what if someone can really innovate product or offering beyond it!

There are also clear positions created by brands but sometimes do not connect to customers due to redundancy or obvious positioning. Can you clearly say now, right now, which AC promises clean air, which one speaks about better cooling capacity, which call themselves as AC experts? AC is meant for effective cooling or clean air is as obvious a factor as saying a TV with the best clarity. It is too generic that it may pass over consumers head and which may lead to not-so-clear positioning. Other hand, I have not seen anyone, (atleast the prominent ones) claiming to produce the smallest AC or a perfumed AC. It starts with the idea to innovate that leads to product innovation.

A unique, innovative and distinguished product offering can go a long way in creating a strong brand identity and recall. Although positioning is unrelated to product, it needs to be backed by the product meeting its promise. So, a vision to create a differentiated product is a starting point to produce a product that meets the promise. I hope, atleast hereon, we would not see many brands that does just the reverse.

Bought and Sold

If marketers are all the time thinking how to sell, customers are also spending the time for making purchase decisions . So , how can a marketer influence a customer consciously or sub-consciously? Are all the products in the world being sold by a salesman or is it being bought by customer?

The below 'BES grid' plots 'type of sale' against 'value' and can be used to classify a product into any of the one 6 basic types. This identifies the key challenges specific to each of them so that they can be positioned and addressed appropriately.

A customer can be classified as a 'bought customer', when he picks/purchases a product without any salesman's influence but with his own sense of approach. A customer can be said 'sold', when he is actively being pursued by a sales person explaining the benefits. An 'evaluated buy' customer is one who evaluates different brand choices before making a conscious decision; a mix of both types.

High Value Low Value	Type 1 Indulgence area (Electronic gadgets like mobile and watches)	Type 5 The 'Upper grey area' Large consumer products (home, Loan, white goods, medium segment car)	Type 3 B to B area (Capital goods, auto ancillaries)
	Type 2 Commodity area (Home needs/groceries)	Type 6 The 'lower grey area'	Type 4 Salesmen area (Credit cards, holiday packages, Insurance)
	Bought	Evaluated Buy	Sold

Challenges for marketers:

For type 1: How to create the 'indulgence factor'? Recall Merc and Blackberry

For type 2: How to create recall and salience? You can recall Pepsi, Gillete

For type 3: How to communicate value and create confidence? Eg: BHEL

For type 4: How to effectively communicate and sell/pitch? Eg: ICICI

For type 5: How to create recall and how to communicate value? Think Nano!

For type 6: How to create recall and recreate salience?

Type 1 and 2 involve marketing skills to create brand salience through any of the mediums. Type 3 and 4 involve people skills and are heavily dependent on them. In Type 5 and 6, the 'reference circle' plays a powerful medium influencing the decision making.

A product might belong to 'upper grey area' when customer wants to evaluate it against different high value products of the same category and allows himself to be 'sold' of the product. The same applies to 'lower grey area' for a low value product. But here, they generally may be the Type 1 products that seep into this category once they loose their 'brand salience'.

In all, these 6 boxes could only act as 'positioning boxes' in customer mind with respect to the value and type of sale-approach.

Creating Brand-choice Problem

Has there been an instance, during your regular shopping visit to a mall or super market, when you wondered which brand to pick of a product? If yes, then you must not be the lonely one out there. Inspite of heavy pounding of commercials and infomercials from TV, PR stuff from newspapers and attractive billboards, customers still suffer from brand-choice problem and this is a sign of some healthy competition in the product line.

I have tried to segment the brand-choice problem using a scenario model of planned vs. unplanned purchases. To make it clear, a scenario where a customer purchases a planned item can be called a planned purchase. Any other item that he purchases during the same visit, apart from a planned purchase item can be called an unplanned purchase.

	Brand preference	No Brand preference
Planned product purchase	Gold mine (Brand-choice problem exists)	Tissue paper (No Brand-choice problem)
Unplanned product purchase	Oil explorer (Brand-choice problem exists)	Hair comb (No Brand-choice problem)

In a 'Gold mine' scenario, there is a clear brand preference for a planned purchase item (normally a value added product). There exists a clear mind-space leader in customer. However, this is a sitting duck for competitors, who are consistently creating a brand-choice problem for the customer. Example: A toilet soap market.

'Oil explorer' is a scenario that again shows the presence of a mind-space leader. But, the cost involved here is high for creating a brand preference, as this market generally comprises of indulgence or impulse products that have a long, irregular purchase cycle. This is high risk and return type of scenario. Example: A high premium chocolate market.

The 'tissue paper' scenario is a product-driven scenario where the importance of product overwhelms the brand and hence the chances of brand-choice problem are bleak. These are generally low value added or a commodity product. Example: Spices and pulses.

'Hair comb' scenario traces tissue paper scenario closely in that the chance of brand-choice problems are bleak. It differs in the reason of purchase. These are generally impulse or indulgence products where the need for product is little less compared to 'tissue paper' scenario. Example: Hair comb

'Gold mine' and 'oil explorer' scenarios offer marketers the scope for creating brand-choice problems, since there exists an established brand preference. 'Tissue paper' and 'Hair comb' scenarios are product-driven scenarios and creating a brand salience in these areas might involve huge investments and lesser ROI.

Where are we? Concluding part

I am still conceiving it. Will be up with it shortly.

Where are we? Vol 5

Volume 5: The five great Revolutions? (AD 1700 – AD 2000)

18th, 19th and 20th centuries are periods of sweeping changes not because they are close to us in history but because it brought about dramatic, fundamental changes to mode of governance and brought paradigm-shift in models of running a state. Year 1776 was known for 13 colonies in North America beginning their fight against the British Empire, in its quest for independence, what is later termed as “American Revolution”. Forty years before this event, the religious ‘great awakening’ occurred which continued in next centuries as great awakening II, III and IV. These were considered as the continuation of Protestant reformation.

It all started in America and the French, meanwhile was hit by a financial crisis due to its involvement in American Revolution and decided to embrace ‘constitutional monarchy’ in 1791 through “French revolution”. Although the constitution did not last long, the king and legislative assembly shared power, which was the first taste of success for things to follow (Democracy). This was later restored in ‘Second republic’ of 1848, which provided universal suffrage and relief from unemployment.

The third revolution, the “Industrial revolution” can be pin pointed as the single most factor that completely changed the lifestyle of European people and in a way redefined the modern society. The extensive mechanization brought about steam engines to machine tools to IC engines. The science and technology were the focal points around which the rapid growth powered during 19th to 20th century. One of the reasons cited for such a rapid growth of scientific technology is abolishment of feudalism by British in 17th century and wide scale availability of resources like coal. Suddenly there were too many different types of industries to employ the entire masses, with each industry supplementing each other’s productivity. This created huge wealth and accumulation of which lead to creation of financial markets. In all, we could say it was capitalism that was in its neonatal stage.

By early 18th century, trade and commerce flourished great extent between Europe, American, Asian and East Asian countries. The lower overhead costs and huge profits experienced by the British East India Company in India drew many companies to the country. Today’s stock market bubbles were seen as early as 1720 in what is called as “The south sea bubble” crisis. It was also the same century in which NYSE was established.

The Communist Manifesto by Karl Marx and Engels and the revolutions of 1848 brought about a sea change to common mans thinking. “Workers of world unite” resonated well with the worker class who were perturbed with the new age unknown phenomena called industrial revolution, which mechanized all work. There was huge unemployment across Germany and France with widespread starvation among worker class. The natural outcome for all of this was the then set equation of Capitalism = antonym of Communism.

“The Russian revolution” in 1917 echoed Karl Marx’s Communist Manifesto in Russia against the Tsar autocracy. The October revolution finally led to formation of “Union of Soviet Socialistic Republics –USSR”. It was the latest largest victory against a monarchist rule. The First World War gave the death knell for monarchy and establishment of republics across the globe including the German Empire and Austro-Hungarian Empire. The great aspirations for land and market among land-starved European nations caused the gigantic world wars in 20th century, with the treaty of Versailles and League of Nations as their by-product. The political borders were rearranged.

The last and recent revolution

Feudalistic, colonist germs have just been tranquilized in 1947 in the country of masses; India, which has seen the largest shrinkage of GDP over centuries. As they say it, few centuries ago, even before the modern economic concepts evolved, it was a booming economy with a thriving local handicraft industry, thereby making India’s contribution to the world GDP as high as 30%. It was with the advent of colonialism that the handicraft industry and Indian production suffered to the levels of Hindu rate of growth.

India hit a rock bottom in 1942, when the great Bengal Famine occurred and over 30 lakh people starved to death. Shortage of food supplies due to world war and shortfall in grain production were cited the grave reasons. This haunted Indian governance and it proclaimed to reach self sufficiency in food through rapid expansion of farming areas and double cropping. India, with its help from Mexico, maximized production with a high yield during the period between 1967 and 1978, which is popularly termed as “Green revolution of India”. This rapid expansion brought about the advent of new farm-related industries, which further created more jobs and helped in the expansion of GDP.

These five great revolutions brought about path breaking concepts and innovations which defined the course of human life at critical junctures; the concept of democracy with the abolishment of monarchy, feudalism, slave trade; the innovation of a capitalistic state leading to upliftment of social and economic status of people; the concept of communism based on common ownership; the innovation of agricultural methods in sustenance of human life. Although there are many significant events in this time period, these five defined the dynamics of the society

Where are we? Vol 3 & 4

Volume 3: Why was the early medieval period so dark? (AD 600 – AD 1500)
It was in 1000 AD when the Normans invaded England; feudalism is set to have invaded. Welcome to the dark ages. The age between 13th to 15th centuries was a period of lull, with little constructive activities. It also marked the period of feudalism, wherein the ‘Lords’ offered ‘Vassels’ (common man), a ‘fief’ - piece of land, for providing him military support. If we can replace “vassels’ with “peasants” we could arrive at the Indian scenario. The feudalism was so much intertwined with the aggressive religious activities during this period. The emergence of Islam in Arab world (AD 600), the expulsion of Jews from Spain, early stages of Protestants reformation in Europe and rise of Sikhism in India brought about too much concentration on religion and supposedly little economic and cultural development during the dark ages. Finally, only the fall of Constantinople and rise of ‘Renaissance’ brought about the end to the dark ages.

Though it was a period of little economical and cultural activity, it was also the origination period for feudalistic concept and religious dominance. The monarchist rule and the quench for land continued.

Volume 4: Was there a real Renaissance? (AD 1450 – AD 1700)
Leonardo da Vinci, the “Renaissance man”, Michelangelo, William Shakespeare and a host of others brought about a cultural advancement that spread from Italy to rest of Europe. This was the late medieval period, which spanned from late 14th century to 17th century. This period saw the emergence of the strong Mughal dynasty founded by Babur in India. Babur’s grandson, Akbar contributed to the cultural development in Middle Eastern part of the world and greatly to Indian music. In the western world, Martin Luther brought about the Protestant reformation (the age of enlightenment) and anguish against Jews. On the scientific side, “father of astronomy”, Galileo and Copernicus brought about scientific revolutions.

To sum up, it was a period of numerous invasions of kingdoms at the fastest pace, thereby large local uprising & civil wars, the continuation of religious discomfort and discovery of new countries & rivers. The cultural uprising and start of political border rearrangement dominated the later medieval period. On Economic development, the emergence and conglomeration of British East India Company to trade commodities between Britain, East Indies, China and India was a significant step towards the oncoming industrial revolution.

Where are we? Vol 2

The different periods of development in GHDM starts with the early days of human development in Indus valley (3000 BC) that started with the invention of wheel and spans across various era’s: the rise and fall of Rome (900 BC – AD 500), the Norman conquest (AD 1000), dark ages of 13th to 15th centuries, the Renaissance period of 15 to 17th centuries, the revolutionary period of 18th, 19th and 20th centuries and the current state of well established democratic republic capitalistic societies. Now, what has been changing over these years in GHDM map and what has not? Is there something visible towards which the societies have moved? If so, what are we, the self-proclaimed ‘modern society’ tending to move towards? Are these questions hovering in your mind? No? Then, I guess you should proceed to read further.

Volume 2 :What did we achieve in early days? (3000 BC – AD 500)

As long as Man traveled long distances in different directions, in his quench for exploration, radiating from central Africa, there seemed to be little problem. It is when he got into a habit of settling at a favorable location, (along rivers on most occasions) there arose the numerable needs and problems. This was the starting point when Man got himself into a vicious cycle of creating problems and eventually solving them, ending in creating a new problem for the next generation. As he settled down, he required sanitation facilities, which earlier were never a problem. The construction of sanitation facility required bricks and water, which was provided by some other citizens. There were few other groups of people who mastered in pottery and some in metallurgy (copper & bronze). Here arose, what we now call an “economy”. People specialized in different fields and each of them shouldered responsibility for a certain activity, in the interest of the larger society, thereby earning themselves a livelihood. But don’t we need someone who could manage the economy and offer protection to the people? This specialized group of people called chieftains or kings carried the responsibility of governance. Kingdoms were prominent across various places like Babylonia, Assyria, Turkey, Persia and China but not in Indus valley. Anyone who had the capability and the trust of people could be the chief. But soon it had eroded into a monarchist rule. The dynastic rule continued through generations and no common man could be part of the governance. The status-quo continued and consolidated during the supreme period of Julius Caesar during 1000 BC-AD 300 in the west, Qin dynasty in China and Mauryan dynasty in India. The dramatic fall of Roman Empire and Mauryan Empire brought about the end of a glorious era pushing us into the ‘dark ages’ of the medieval period.

Man slowly and carefully built the structure of a society where large diverse people colluded to live together by interweaving economic activities for society’s sustenance and governance for security and ordinance. There was the third type of fabric in the interwoven structure of a society, which played a very prominent role, and ‘telling’ effect on the other two: The Religion. When Man tried to think on the lines of purpose of life in this earth and define it, there emerged different religions. It was about this time, Judaism and Christianity emerged as dominant religions in the west and Hinduism, Buddhism and Jainism emerged in the east. Although religions were a set of beliefs, it came along with many rituals and practices that eventually paved the way for clear demarcations in the society. These were the early seeds of division (of society) sown not by the religious leaders but by the followers. It has an impact for 3000 years and counting!

In total, this was a period man built the mould for forming a society. He settled at a place, supported his living, secured himself from physical threats, built kingdoms, understood a way of living; the religion.

Where are we?

Preface “Where are we” is written with a neutral stance with no intention of taking sides. Although the volume 1 and 6 might be opinionated, these are just my own and might not be true. Volumes 2 to 5 speak about historical events in perspective of the relative position to those of the larger Global Historical Development Map.

Volume 1: Are we placed in a situation, never before? The biggest mistake in understanding anyone can make today is to consider himself living in an ordinary unchanged routine world. The biggest mistake in assumption could be the belief that political, social and economical situation existing today would remain the same forever and it can only go one-way that is towards the better side. It makes more sense in reading further if you agree atleast partially with me in the above two cliches.

I believe we are in an extremely extraordinary situation! A situation where there is an increase in world economic output to $54 trillions but a higher unemployment rate of 6.1% prevails. A situation where there are just 44 monarchies and more than 140 republic countries but still there exist discrimination in its many forms. The two situations stated above namely the capitalism and republicanism emerged well over a century ago to change the facets of the common people, give people a better living condition and a direct or indirect participation in country’s policy decisions, law making and the running of a nation. It looks too silly and obvious when we say today that we have the right to write a blog, right to information and right to caste a vote. The better way to understand the importance of something we are enjoying today is to consider this analogy. A rich man with all his comforts becoming a pauper one day will suffer too much compared to a born pauper. So, there can be no denying the fact that we are enjoying our rights due to our embracement of republic form of government and better living standards due to embracement of capitalism.

However, here, the broader question still lingering in my mind is where are we now in terms of our Global Historical Development Map (GHDM)?, a map considered to be a mosaic of socio- economic, political, scientific, art & humanitarian development of human race over centuries. The relevance of the above question I believe would help us understand the current situation at a macro level and hence would foster informed opinions and decisions for the further development of our societies. To put it simply, I think these are important requirements for a visionary. I say the captain of a cricketing side is a visionary. He ought to know the nature of his team, the standing of his team in relation to other teams so that he can take his own team where he wants to in the future. This ICC point’s table in cricket is the scale of measurement that can be compared to our GHDM, with different teams in ICC tables comparable to different periods of development in history.

Changing needs

Being human started in Savanna 20 thousand decades ago. It was the time he scavenged for food to fill his 2-litre stomach and fought the wild beings for current days tourist spots, the caves. He must have got a bit cozy and realized he infact needed a covering over his body from external environment. Yes, those are the physiological and safety needs namely food, shelter and clothing at the bottom of the Maslow’s pyramid. Turn back to 2008, being human we still require all these 3 basic needs to be met for survival. But do these three alone stand good? Amidst all this power shortages, imagine, do you really think an urban or even a semi urban human can manage a nights sleep without power? Power might not be an absolute necessity for survival per se but a physiological need at the bottom of pyramid very close to being an absolute necessity. Say suppose you still managed a night out with mosquito, next day morning it’s the locomotive, which facilitates the transport to your office, market, mall, client or to a vacation. Since remaining within the shelter does not guarantee food, oil or the fuel for locomotive has become the next close absolute necessity. Say suppose the pirates of the Arabian have taken hostage of an oil tanker and petrol stations decided to tie knots to their empty drums front of their shops inspite of oil bonds issued by government. So, sitting back home, the PC or mobile becomes a near absolute necessity. Can we even afford to imagine a day without a mobile or PC at work? Nearly impossible. So we can say that power, oil, and silica have slowly creeped into human lives so much so to call these as developing absolute necessity (DAN) as compared to developed necessity of food, shelter and clothing.

This is very easy to relate DAN to macro economic situation prevailing in today’s world. Have we not reached the climax (who knows it is or not?) of the petro dollar issue on oil, or did we not witness the civil nuclear deal process or are we not witness to the Silicon Valley revolution or the telecom revolution? Its all been happening around with visionaries around the globe keeping a close watch on basic human needs on a macroeconomic viewpoint. Nevertheless, ‘being human’, for Maslow and me remains at the top of the pyramid – the self-actualization.

Nothing prime about it!

Very often do people speak or write in a language that it becomes impossible for someone unrelated to the industry to understand a concept, a phenomenon, a process or an event. Sub-prime crisis as they call it as, is arguably one such one. It is too simple to understand the logic but too complex is the entire chain of its operation.

Just forget why Lehman, WaMu, Wachovia is falling. Try answering this question. Who do you think lends you money when you take a home loan? The banker? Yes, you are mistaken. How would it leave a taste on you, if I would say it is me, a common man who is indeed lending my money to you, when you take a loan from bank?

Now, this is the chain. You apply for a loan to a bank, which tenders you, money. Your bank is in-turn funded by an Investment bank, the big daddy of US economy, for exchange of your loan document. These I banks collates all such loan document from different people and different banks and creates a bond (called Real Estate Investment Trusts -REITS). These bonds are finally issued back to common people like me, who wish to invest in such bonds, which are now called as CDO (Collateralized Debt Obligation) or ABS (Asset Backed Security). So in this vicious cycle, I, your neighbor could possibly end up being your lender, notionally, when you apply for a home loan.

So, why does all these I banks fall off? Now, to put it as mean as possible, if you earn 10,000 Rs per month and pay 5000 Rs as an EMI, it is a prime loan, whereas when your EMI is 9000 Rs on a 10,000 Rs monthly salary, it is a sub-prime loan (relate to the fact that in India we have PLR- 'Prime' lending rate). When the credibility and capacity of the borrower to repay loan decreases, the interest rate on loan increases since the risk is perceived higher by the bank. So, someone with a good credit rating will be offered a prime loan at say 8%, the other person with low credit rating will be offered a sub-prime loan at say 10%. It’s a double whammy for sub-prime borrowers – lower disposable income and higher interest rates. Hence, a small increase in interest rate would shatter sub-prime borrowers capacity to repay and he begins to default on his EMI payments. It all starts here. Non receipt of EMI means your lender banks cannot pay back their EMI to I banks, means the I banks cannot pay back the investors who had invested in their bonds. Now, bank in their helplessness try to sell out the house (Foreclosure) - the distressed property of its borrower to recover their lent out money. But due to adverse market conditions, the inflated market value of the house had dropped like a stone. Hence, the recovered money is at a huge discount to the lent out money. The I banks are at great pressure to pay back investors and the money they have is less – the stage is set up for the closure of business. The entire financial juggernaut comes to a halt as it has done now.

US banking industry thrived on converting a loan into a tradable paper and leveraged too much on it, to the levels that now a house is available at as low as 72,000Rs. Back India, thank that we are still very slow in implementations largely due to our democratic set up that we did not copy US in CDOs and REITs just in the exuberance of consumerism.

22nd Century - Pages from History

The period of 20th and 21st century was an era when people used automotives run by oil as a primary mode of private transportation. These automobiles had more than 1000 moving parts operating in a highly complex inter linkages; all working towards rotating an axle which in-turn rotated the wheels. It was the time when the engines were driven by use of oil as a fuel. As the oil was the prime and major source of fuel found at that time, all measures were made to minimize the consumption of it in the automobile. However, when automobile was invented, it was run by steam for a shorter period of time. Also, it was the time when whole of the world believed in converting a reciprocating motion to a rotary motion through an engine was the only solution to rotate the wheels of an automobile. The more powerful and sophisticated the automobile, the more the price. The maximum speed it could achieve was 200km/hr and the some of the best in class could achieve up to 600km/hr, which is still is only 1/10th the speed of today’s automotive.

The beginning of 21st century saw emergence of few hybrid automotives. However due to lack of capacity in electricity production and the self interest of large automobile companies (who had invested hugely in their oil run engine automotive production) might have caused the sluggishness in moving towards a newer model of automotive. Also one has to bear in mind that this was the time when power was just growing in stature as a large infrastructure commodity and the whole world’s capacity was just 1/1000th of today’s installed capacity. Although batteries occupied a prime part in an automobile, its functionality stopped at starting the vehicle and lighting it. There were not any significant breakthroughs in battery technology until the birth of 21st century when mankind brought about use of Lithium-ion batteries fueled by the necessity due to growing concerns on availability of oil. Here, it is also worth noting that it was in the 20th century, mankind managed to make a shift from locomotive rail engines to electrical engines in large economies. However in few countries, diesel engines were still predominantly used.

There is little doubt that automotive revolution started not in 1889, when Daimler and Maybach invented gasoline driven automotives, but when Henry Ford mass produced it in 1896 and took the world by storm. There is no denying the fact that highly skilled people over different period of times over 20th and 21st century had mastered engineering and the working and the modeling of the automotive, from reduction of engine noise to optimization of fuel consumption to timing of fuel delivery and so on and on. But mankind of those centuries seemed to have too fixed on basic functionalities of an automobile and carried this on for a quite a long period than it should have. It took them nearly more than 150 years to create the second automotive revolution. The reasons are not clearly known and there seems to be an endless debate. All that we can wish is to see the next automotive revolution in this 22nd century; who knows, our fuel cells could be replaced by a no-fuel automotive or a flying car, which has been so lucrative for few decades.

Money Matters?

Imagine! If a firm offers its shares as your only salary, will you accept? None on this earth with true sense will accept however extraordinary the firm might be! Reason being, even if you wished to get yourself a toothbrush, you would need an instrument, what is known to all of us as a ‘currency note’. The shopkeeper does not accept any other instrument other than a ‘currency note’. CN remains as the preferred instrument for all transactions, which is nothing but an agreement paper between two parties that party X is willing to pay party Y, a sum of XX rupees.

Now, is it not a paper, which has a value of cost of production of the note itself? Is that an employee is worth just a bunch of papers for his month’s work? Is that the value of his work? Since the retailer is comfortable in getting a CN for exchange of a toothbrush, we do not complain. Imagine! Out of wild dreams, that the annachi shop refuses to give you toothbrush for a piece of paper (CN). He demands a 50mgm of gold as he feels the demand for it has been on rise. Remaining still in the dreams, this is the only shop in the city where you will get a toothbrush. We do not have a choice! We would give him a 50mgmof gold for exchange of a toothbrush. Now, the problem is I have to store gold at home and carry it every time for purchase of a toothbrush, once in a month. It’s a problem. So I cut a deal with him saying that I would write an agreement note saying that I owe him 50gms of gold, every time I bought toothbrush from him. I would handover that agreement note instead of physical gold during every purchase and would once a year settle his gold due upon receiving all the agreement notes. Now coming out of dream, in today’s world this agreement note is what is termed as the CN. Since everyone trades in CN (ie, you receive agreements-CN from your employer and give it to your retailer for exchange of goods and goes on) no one is asking for his settlement of gold at the end of year. The principle is that the underlying asset for CN is gold. The value of CN is determined by the gold.

Going back to dream world again, if I had only 10 gms of gold I cannot issue CNs worth more than 10 gms for anyone in a month. Now that is what is called as Cash Reserve Ratio (CRR) in today’s world. Every country maintains a certain minimum level of gold as underlying asset (Recall: previous para) for printing and issuing currency notes. For example, India would maintain 100 kg of gold in its treasury, to print and issue 50 crore of rupees into market. Similarly, banks need to maintain minimum amount of rupees to issue a certain amount of loan. For example, North Indian bank has to maintain 10 Rs in its account to issue 100 Rs worth of loans. The 10 Rs, moreover the 10% is called as CRR. The frequent increase in CRR we hear in news happens when government wants to strangle the supply of money. By increasing CRR, banks are forced to maintain higher money in its account to give the same amount of loan. Hence it can offer only less number of loans, thereby decreasing money supply in market. This is a strategy used at times of high inflation, which requires cut down in money supply. So, the humans have created a magic! They have created something out of nothing! Created money out of nothing! Now, we see the same trend in gold ETF and stock/commodity futures. The underlying asset for gold and stock/commodity futures is the gold and stock/commodity by itself. So as time passes by, man could be using just the ETF and futures for trading, forgetting the actual underlying asset. This is similar to man forgetting gold as the underlying asset for CN and still using CN as the trading instrument. So who knows, be prepared to use a commodity future or a gold future to buy a toothbrush in the future!!

The third 'ism'

Lenin said there would be rise of capitalism before communism quells it. True, that in India we are riding the wave of capitalism now, boosted by globalization. M&As, increased job opportunities and increased per capita income. Looking at the power position at the central government, a vast majority of residents in India believe responsible, constructive capitalism is the way forward to eradicate poverty, equality and total well being of society. There is a faction of second majority who still believe and are hopeful that communism is the way forward for equality among society and its functioning and are very hopeful that it will topple capitalism someday. They might have derived the strength of their ideology from looking at history of other countries, which have succeeded in Communism.

Till this point, I believe no one knows for sure which way our society will move towards in future. But everyone will accept for his money, that there are not only these two ISMs, which are dominantly functioning in our country. There is this, ‘3rd ISM’ that has slowly and steadily emerged over years, with the support of globalization, technology, manpower, with very much the same factors that had fostered the growth of other existing ISMs. This 3rd ISM namely the Terrorism, if looked at a point of neutrality (without all those negative connotations attached to it), is again a group of people trying to establish their set of demands/agenda on behalf of some. This can look similar to the war waged by likes of Lenin, Joseph Stalin and other communist leaders against the Zars in Russia during 1900s. But there, people fought for almost all of their people and lost their lives. But here people are fighting for few people and are taking others lives. An ISM will be justified in the society if the agenda is backed by vast section of people and its people ready to sacrifice their lives for it and not definitely by taking others lives. However, this again has caused a loop, in that the larger or majority’s interest is taken care of and what happens to the interests of minority? These suffering minorities want to threaten the majority, using this as a tactic to satisfy their unmet needs. Keeping aside the discussion of whether these needs are justifiable needs or unjustifiable, I am made to think that in whichever place, if majority can at least look into the needs of minority, the hassles might be considerably reduced for the society and the party. More importantly, that party would have served the nation/society holistically, irrespective of people who had voted for them.

All out for 272

July 21, 2008, TV channels were claiming this is the first time they are covering a confidence motion in parliament and D Street behaving like a Trojan infected PC, not knowing what to do. But the day would belong to Doordarshan for TRP, for sure, as its Lok sabha TV provided a right mix of thrill, comedy, action and stunts for entertainment value.

Interesting to note that some parties are considering this period as a test of character/strength of their belief in policies, some considering as an opportunity to take revenge, few looking at it as an earnings season (1^st quarter?) and few to console their battered ego. In all this mess and modalities of constitutional engine, I remain puzzled about the role of a Citizen. His duty and fundamental rights are executed once in 5 years and that’s the end of it. Do the electorates have a forum or a redressal mechanism for monitoring the functioning of representatives thereafter? A checkpoint, which would monitor his majority within his constituency every year or in fixed intervals. This would enable him to echo the opinion of the majority of electorates in his constituency- thereby he can be termed as a TRUE representative.

Coming back to earlier point, incase of crisis situations like this, the 540 odd people at the parliament could not form an exhaustive sample for the 100 crore people, nor does it look possible that 100 crore people can cast votes on demand. So, forming smaller representative group of people from different walks of life for each constituency can be a better exhaustive sample set. I understand you saying that this ‘representative group’ will burgeon to be another bureaucratic set up. However how it can be formed as a better collective sample devoid of bureaucracy is what is to be desired. Any thoughts?

E.C.O.N.O.M.Y

The Prime engine which directly impounds the money circulation in and out of a nation seems poised for an overhauling in India and breakdown in few countries.

The fascinating point is that true to the analogy of a Car engine, economy engine does not run at the same/increasing rate (GDP growth rate) always. It is dependent on desired functioning of other engine components like the piston, piston rings, cylinder block, lubricating oil, engine mounting etc. which have a knack of breaking when overstressed(the creation of economic bubble). The other components being the money value (inflation/deflation), corporate earnings, per capita income, foreign exchange, political stability, regulations, tax regiments and government policies in an economy.

Now, as a result of breakdown of overstressed components of engine, the engine now slowly starts degrading in its output (the slowdown). Because of the inefficiency of the engine, the other components of the car like fuel efficiency and tyre life seems to go down. The equivalents in economic terms are the money market, capital market, commodity markets which gets affected.

As we all know, any vehicle is due for service at regular intervals in order to cleanse the clogged parts and overhaul inefficient functioning of parts. Once this is done, the engine will be back at its best; infact biking geeks will accept me in saying that the engine gets 'well set' after running for few thousand kilometers and after couple of services. So, our economy which has got overheated had its own problems of worn-out parts. However, ours being a new vehicle (Emerging markets) might not require in-depth servicing and can almost be back to normal efficiency of working. In contrast, the old vehicles(Old economies) which had seen many service check-ups in its lifetime might need complete replacement of critical parts which might take a longer time.

The soaring oil price, commodity price, huge inflation, high interest rates, dropping corporate revenues, per capita income are no doubt slowing/can further slow the economic growth rate. After an overhaul of all these above parts, the GDP engine might be kicking back.

However, what desired to be seen is how quickly does a driver(of Emerging markets) recognize that his components are degrading and needs a servicing for his vehicle? Are we a bit slow on that?

P.S: There has been clear discrimination of 'economic cycle time' above. These are deep cycles and i believe the changes talked above from one line to other line may take years.

Human Capital Dilemma

How does one measure a country's stock of human capital ? (This is from one of my Linkedin answers)

If you were do define the measure of human capital, it would have made this question even more interesting.

1. If you want to go by NUMBER measure, you know how to do that.Just add all employable indian population.(again, you can set criteria for 'who is an employable indian')

2. If you want to know the VALUE measure of human capital, then add salaries of employed population. (You know, in a way this is an another way of calculating GDP of the country)

3. If you want to know the POTENTIAL VALUE measure of human capital, add salaries of employed and employable population.

4. If you want to know KNOWLEDGE value of all employable population, well, it would have been stupendous had i known this. The classification based on education levels should give a close answer but never a right answer.

Also realtive to this, you can check out more on HDI- Human development index. Ther are some cues you can take based on how HDI is calculated. But this is different from your HCM- Human capital measure.