Making money out of nothing at all...

What has traditionally been the primary means of making money by McDonald’s corporation? Most of us wouldn’t have to think much before answering that its hamburgers, fries and the fast food items that have been responsible for the genesis of the fast food nation. When I read “Rich Dad, Poor Dad”, it gave a different picture. It said that the primary business was real estate. I couldn’t really understand the logic then, but I have a slightly better picture now.

I am currently reading “Mc Donald’s Behind the Arches”, and am thrilled to know the strategy behind making money by the company. Ray Kroc, a consummate salesman, had total control over the operations, and believed that money will follow. But the $950 franchising fees and the 1.9% of the sales didn’t do much to add value to the corporation. It was the acumen of the behind the scenes Sonneborn who could leverage the successful McDonald’s operations to make money in a way not many can imagine. By leasing out land / real estate to franchisees at 20% and then 40% markup it ensured a constant inflow of cash. While it solved the problem of the smaller franchisees (who were individuals starting off a business with their accumulated life’s savings), it also made sure the corporation made money.

The scheme was simple: the company would take a long term lease over a piece of lucrative land and then sub lease it to the operator. And the company had the rights to terminate the contract should things not go as Kroc wanted. In course of time, Mc Donald’s corporation started buying land and leased them out to the franchisees. This was executed by a separate real estate company, called Franchise Realty Corporation. So while the parent company was virtually a cost center, the realty company was the real profit center.

For such schemes and agreements to come to India would require a considerable amount of maturity in the Indian markets. In the two MNC IT companies I have worked for, the premises have been leased, and so the company only pays a rent on it, without locking in capital. Perhaps it makes sense for them, given that they are in no business of real estate, and would not like to end up like Enron (that had numerous non performing assets taking up space in its balance sheet, before the tweaking started).

Indian companies have traditionally been self sufficient. Particularly in the manufacturing sector, companies have bought land from the government and developed their factories. There wasn’t any one who could lease the land out to them. But now that India is witnessing a real estate boom, a steady growth of over 8%, a lot of direct investment from overseas, it is a signal that markets are maturing. I read about a new avenue of joining the bandwagon. The corporates could use the sale-leaseback to unlock capital and get more funds for their primary business. And this capital put in their core business could translate into high ROI. Sale-leaseback transaction is a technique used by corporations to raise capital, increase shareholder value and remove the real estate assets from their balance sheet. This gives operational control over the assets to the corporations.

Why would an investor put in money? The way Mc Donald’s corporation is making money, investors (realty MFs, FIIs, corporations interested in venturing into realty) could expect steady returns. They could have a right risk return trade off by giving it out to credit worthy tenants.

This transaction, even though currently not too popular, is fast catching up. We might find more companies selling off their land and leasing it back to have more control over their capital.

Larry Summers

>From a business standard article

The argument that globalisation is inevitable and protectionism is counterproductive does not provide much consolation for the losers.

Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world's economy from growing faster in the past five years than in any five-year period in recorded economic history.

Given this recent performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration.

Yet in many corners of the globe there is growing disillusionment. From the failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before.

Why is there such disillusionment? Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration's foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth—and that its share of the pie may even be shrinking.

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

It is important to remember that the period between the late 18th and early 19th centuries in Britain and continental Europe was called the Industrial Revolution for a reason. For the first time in human history, the standard of living of one generation was demonstrably better than the one before: in a single lifespan, real per capita incomes doubled and then doubled again. If one looks at the growth rate of China during the past 30 years, living standards are increasing at a rate that will lead to a hundred-fold improvement over a single human lifespan. The impact cannot be overstated.

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.

Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers—whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe—are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.

It is this vast group that lacks the capital to benefit from globalisation and is desperately seeking either reassurance or a change in course. Yet without its support it is very doubtful that the existing global economic order can be maintained.

Let us be frank. What the anxious global middle is told often feels like pretty thin gruel. The twin arguments that globalisation is inevitable and protectionism is counterproductive have the great virtue of being correct, but do not provide much consolation for the losers. Nor can they rally support for policies that maintain, let alone promote, international integration.

Economists rightly emphasise that trade, like other forms of progress, makes everyone richer by enabling them to buy goods at lower prices. But this offers small solace to those who fear their jobs will vanish.

Education is central to any economic strategy, but there is a limit to what it can do for workers in their 40s and beyond. Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 a month.

John Kenneth Galbraith was right when he observed: "All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." Meeting the needs of the anxious global middle is the economic challenge of our time.

In the US, the political pendulum is swinging left. The best parts of the progressive tradition do not oppose the market system; they improve on the outcomes it naturally produces. That is what we need today.

There are no easy answers. The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.

Just as the Federal Housing Administration's effort to make owner-occupied housing more available after the second world war was a crucial part of the policy approach that permitted the Marshall Plan to go forward, so also our success in advancing international integration will depend on what can be done for the great global middle.

Our response will affect not just the livelihoods of millions of our fellow citizens but also the prospects for continuing global integration, with all the prosperity and stability it has the potential to bring.

Understanding supply chain risk

From http://www.mckinseyquarterly.com/article_page.aspx?ar=1847&L2=1&L3=26&pagenum=1

In a survey conducted by McKinsey, the enormity of the risk associated with the supply chain is on a rise. The executives most likely to say that their company's level of risk has risen are those in retailing, manufacturing, and energy; those in the energy industry are by far the most likely to say their risk has increased significantly

The executives rank labor, regulation, and suppliers as the top three supply chain risks on which they focused during their most recent round of planning. Among all risks, the clear leader is the availability, cost, and quality of labor. They are primarily concerned about the availability of well-trained labor. Indeed, though the level of concern varies somewhat, a shortage of high-quality employees remains the top issue among those concerned about labor, regardless of their company's size or location. Among those concerned about labor, labor cost is their biggest worry; only 3 percent of them cite labor disruptions and less than 1 percent of those surveyed cite diseases or pandemics.

What are companies doing to mitigate their increasing risk? Executives cite a range of actions; of these, entering into performance contracts with suppliers is cited most often. Actions that could mitigate labor-related risk are rarely mentioned. The degree of disconnection between risk and its mitigation may be one reason that executives rate fairly poor their company's ability to mitigate their key supply chain risks, 39 percent say they are at best slightly capable of doing so.

Executives say they're making surprisingly little use of some well-known tools and techniques that could help them assess the business landscape and manage risks more effectively. For example, more than half of all respondents say their company either undertakes no formal risk assessment or conducts only a qualitative assessment

Re-modelling the value chain

The stages of the value chain determine the individual components of
the total framework from the source (raw materials) to the final
destination (the end customer). These stages were once a fixed set of
activities and were based on the old industrial model. Michael
Porter's strategy is indeed obsolete now, but we cannot discount the
kind of insight his concepts provide in comprehending the modern
aspects of the value chain.

I've been reading an HBR article and was quite mesmerized by some of
the derivatives of the value chain concept, and how Ikea, the
furniture and home décor supplier banked on its concept of reinventing
the activities of their value chain.

The authors (Richard Normann & Rafael Ramirez) of this article have
done a great job of highlighting this aspect of strategy.

The opening line mentions in capitals that STRATEGY IS THE ART OF
CREATING VALUE. Undoubtedly, this is true from the Porter's times. But
whats different now is that this value needs to be reinvented to match
the current scenario. The value chain concept mirrored the assembly
line view of making a product for the end customer. Globalisaton,
emerging markets, rapidly developing technologies and (of course)
competition compels head offices to relook their value chain from time
to time.

As an illustration, the article talks about the worldwide leader in
home furniture décor company IKEA, which used innovative practices to
transform itself from a small Swedish mail order furniture operation
to the world's largest retailer of home furnishings.

The basic business aspects of IKEA have remained the same. Simple,
high quality Scandinavian design, global sourcing of components, knock
down furniture kits that customers can assemble themselves, and
creating an experience called IKEA. All of these were innovative at
the time the company started, and its efficient logistics leads to
lower costs, and thereby directly expanding its bottomline.

IKEA has a strong relationship with its customers. In fact, it has
added its customers in its existing value chain in return for lower
prices. Instead of the company assembling the components, the
customers can do so (and willingly), and thereby pay lower prices.
IKEA prints more than 45million catalogues every year in 10 different
languages. The company's stores feature free strollers, supervised
child care, playgrounds for children, wheelchair for adults and all
that one would have for the so called experience.

The differentiating concept of IKEA is that it believes that their
customers' role is not just to consume value, but to create it. IKEA
is more than a link on a value chain. It is the center of
constellation of services, goods and design.

So is the case of banks that moved to the concept of ATMs. From being
a pure play service provider, banks have moved to more innovative
techniques, thanks to the underlying technology. Having self operated
ATMs relieves the banks of paying cash by the clerk. Things have
certainly changed with increasing competition, no bank can now survive
that does not provide such facilities.

IKEA has redefined the value chain to move towards a better match
between its competencies and its customers. This is the kind of
integration that all companies in probably every sector should be
aiming for.

Achtung! The new yahoo mail has arrived!

Some of us have been fortunate enough to get a sneak peek into thefuture of yahoo mail, in its beta version which is out for testing now. It has an outlook-ish appearance, a boon for those who are extremely fond of the microsoft's email client.

This outlook like appearance comes with an auto refresh, it claims to
check your email every 10 minutes. Isn't it something taken for
granted on gmail? It wasn't till google came out with its email
innovation. This new interface supports drag and drop, and allows you
to manage your message better.

As with yahoo, it has got a sleek appearance, and can give some thing
interesting to look for. For people looking for beauty rather than
functionality, yahoo mail was always welcome.

It supports only the latest firefox browser (which is my default for
Internet browsing), and (of course) IE. Which means older browsers
will have to make do with the old version. But that's a penalty of not
being up to date.

It supports tabbed browsing, your email messages (or even the inbox)
can open in a new tab. Which means for those accustomed to opening
emails in a new window, will have to open in a new tab instead.

the overall speed seems to have increased. I guess the older version
reloaded every bit of data on the browser every time you clicked
refresh. But now, only the relevant part is refreshed.

It was a long awaited change. With people migrating towards gmail,
yahoo was only a secondary account. This change may not call users
back, but will at least check migration.

Performance oversupply of technologies

I was reading the book The Innovator's dilemma by Clayton M
Christensen, and came across some very interesting insights.

Technologists, in their zeal to attain the vertical limit,
successfully bring out goodies that are brilliant in nature and
acceptable by the market, but perhaps with features that the market
does not need at that point of time. That is the time when the market
evaluates the product from a different paradigm. And this new angle
can be quite devastating for the company.

Taking an example, when we came across Pentium IIs in 1997, they were
quite a rage. 400MHz was the speed many were looking for, and it
seemed that people would have more of it. And they did, with the
subsequent generations of Pentium IIIs and IVs, touching the current
max speed of 3.2GHz. There was a time when a two year old PC was
supposed to be outdated, for they were too slow for the current
applications. Internet demanded more memory and processing capacity,
and so the market was bullish on performance.

Today, I think my two-year old PC with Pentium IV 2.4GHz and 256 MB
RAM runs just fine as it did before. That's because my requirements
haven't changed. I still surf the net, the broadband has increased the
duration online, but the hardware needs are still the same. This is
the time when a 3.5 GHz, or 4 GHz processors will have a tepid
response in the PC market.

My job has required me to migrate from a PC to a thinkpad. I find this
Celeron notebook with just 1.5GHz CPU just fine for my work. Of course
they don't expect (or want) me to play games on this notebook. So if
you were to offer me a higher performance processor, will I be ready
to pay a premium for it? I don't think so.

At the moment, I would be looking at processors that don't heat up
much and consume less power. So my basis of evaluation has changed.

The book mentions about the product evaluation model by a needs
hierarchy. I found it really interesting, for I can relate to the
strategic ideas.

The market views a product in this order: functionality, reliability,
convenience and price.
When a new product is launched, the market will look at the features,
or its functionalities. I could take the example of mobile phones. Its
ability to keep one connected while on the move resulted in focus on
the functionality.
Reliability comes into picture when you have got the functionality you
were looking for, and you want something that does not conk off at
unexpected points.
Mobile handsets, having gotten over the functionality and reliability,
were being looked at for convenience (smaller, lighter, more battery
talktime and the like).
Finally, it all comes down to price. When the market has enough of the
above three, price remains the sole criterion. This is the time when
the product is said to have been commoditized. And commoditization
implies lower gross and profit margins for the company.

The success of a company comes from its ability to make profits. So
instead of looking solely at the functionality point of view, it makes
sense for the company to watch for the changing paradigms of the
market.

Music to the ears

As a comment on http://www.business-standard.com/strategist/storypage.php?tab=r&autono=98422&subLeft=3&leftnm=6

Last year there was this news of some 380 licences to be awarded to radio FM players, with the expectation that it would result in the burgeoning expansion of already existing radio FM business. It has, and continues to have its share of success. But going by the report this comment is based on, its badly commoditized to the extent that once cant really differenciate between stations, unless they re-iterate "You are listening to..blah blah blah". And with a break (which have badly increased in number), all people do is to swich channels hoping some other channel would be playing some a more palatable content.

This report talks about how Go 92.5 in Mumbai has revamped itself to Radio One, taking away its upscale image. I remember last year it played an interesting mix of Hindi and English music, and was my favorite. Unfortunately, those days are gone, for there aren't many listeners like me. At least not on the roads, on the local trains, in the shops. Subsequently, it seems it has been revamped to suit the junta, and has only found a place in the existing list of options that the daily commuters have on their little devices.

When worldspace was launched, I had serious doubts regarding its success. You need additional hardware, and licences which could mean an outflow of some Rs 5000. I neither had the moolah or the penchant for such exclusive music. Somehow it has found some place in some exclusive outlets, and now I don't find it an atrocious idea. It is a niche concept, and therefore commands a higher premium. And without ads, its actually music to the ears!!

Lightening fast email?

You must have seen and smiled at the latest rediffmail ads comparing itself with the legendary hoohaa mail (we all know which is the control set), re-emphasizing its forgotten lightening fast competencies. I remember seeing rediff.com boards all around the city declaring itself to be the fastest one around. It did find a substantial share of free signups, but that was the turn of the last century.

Over the past 6 years, other primary email service providers have worked hard in revamping their image, and thanks to the increasing capacity of the ISPs, life is a lot better now. The new entrant, the 1998 born google came in with its platter of innovations, and flooded the market with its own version of email, the gmail. Too many renegades like me dumped the legendary rediff.com to embrace the new and promising technology. After all, in the absence of exit barriers, all that resists change is inertia.

Though I have kept my rediffmail account (had passed on this email id at the times when slam books were a norm), the worst thing about rediffmail is that you have too many messages welcoming you every time you log in. unfortunately its not your fan mail, but mails from wannabe fans. And fans that want your business, whether you want their service or not. It may be argued that there are downsides of free services, so if you want a better spam free email, upgrade to rediff pro (and pay an annual fee)

This problem won’t be taken so well by the people who have options. Google has created a revolution of its won. And gmail is definitely incomparable. So where’s the competitive advantage for rediff?? The new outlook like interface may appeal to those with years of outlook experience (and works only with IE), but not too well with people who want hassle free service.

Music to the ears??

As a comment on the business standard article

Last year there was this news (my post) of some 330 licences to be awarded to radio FM players, with the expectation that it would result in the burgeoning expansion of already existing radio FM business. It has, and continues to have its share of success. But going by the report this comment is based on, its badly commoditized to the extent that once cant really differenciate between stations, unless they re-iterate “You are listening to..blah blah blah”. And with a break (which have badly increased in number), all people do is to swich channels hoping some other channel would be playing some a more palatable content.

This report talks about how Go 92.5 in Mumbai has revamped itself to Radio One, taking away its upscale image. I remember last year it played an interesting mix of Hindi and English music, and was my favorite. Unfortunately, those days are gone, for there aren’t many listeners like me. At least not on the roads, on the local trains, in the shops. Subsequently, it seems it has been revamped to suit the junta, and has only found a place in the existing list of options that the daily commuters have on their little devices.

When worldspace was launched, I had serious doubts regarding its success. You need additional hardware, and licences which could mean an outflow of some Rs 5000. I neither had the moolah or the penchant for such exclusive music. Somehow it has found some place in some exclusive outlets, and now I don’t find it an atrocious idea. It is a niche concept, and therefore commands a higher premium. And without ads, its actually music to the ears!!

Leading the revolution

While there are may books on innovation, there aren’t many that tells how to train your brain to innovate. I have been reading two classics back to back, both of which ask me to challenge the status quo. But have I?

I am talking about Gary Hamel’s Leading the Revolution and Kenichi Ohmae’s The mind of the strategist. I did find a lot of substance that actually made me think, and this process made me a fan of the two authors.

Gary Hamel opines that incremental innovations are no longer sufficient, they need to be replaced by revolutionary ones. Though the costs may not be humungous, only the ones having substance can survive. All good ideas are mocked at, and if an idea is instantly accepted, it may not be good enough!!

Hamel has given examples of real-life corporate rebels, such as John Patrick and David Grossman at IBM, Ken Kutaragi at Sony, and Georges Dupont-Roc at Shell. His message is the same to "old" and "new" companies alike: "Industry revolutionaries are like a missile up the tail pipe. Boom! You're irrelevant!" So join the revolution and avoid the explosion.

Its quite unputdownable, but given my time constraints, I need some time to finish it.