There are always some basic questions that haunt us more than the complex puzzlers. Invariably, simpler and logical answers to these basic questions make you feel a lot better than finding a scientific solution which hardly makes anyone feel any better than not knowing in the first place.
Some Basic questions in Finance
1. What the hell is a market portfolio ?
2. How does firm value vary with Capital Structure ?
Sharpe and Miller , who addressed these questions are both Nobel Laureates . Lets see how difficult it would have been if they never knew basic Maths !
Market Portfolio
Leading finance books in the market claim that
" Market Portfolio is a portfolio that contains all of the available risky assets in proportion to their total market values " .
Remember what we studied in grade 6 ?
a/b = c/d = e/f = (a + c + e) / (b + d + f )
This is what Market Portfolio means . For simplicity , let us assume that there are just 2 stocks Infy and TCS and just 2 people (P1 and P2).
Infy costs Rs. 10 and TCS costs Rs. 20
P1 has Rs. 100 to invest and P2 has Rs.200 to invest ( they can have different resources) and they invest all their money
Now, in ideal market conditions (equilibrium ) , P1 and P2 would have equal information and hence would expect equal returns. If this is the case,both would have to invest in the stock in the same proportions so as to yield the same returns.
If P1 buys infy for Rs. 20 , he spends 20 % on infy
P2 will also buy in the same proportion , hence he buys for Rs. 40
Total value of infosys = Rs.60
Total value of all stocks in the market = ( 100 + 200 ) =300
20/ 100 = 40 /200 = 60 /300
The above logic holds good for TCS and for any other stock available in the market ( two, in our case)
Now in a real life scenario, one cant really find what proportion each person invests in a particular stock , but i can always know the total market value of Infy and TCS . Hence i can find total market value as sum of Infy + tcs
infy / (infy + tcs ) is the proportion in which every rational investor in an equilibrium condition would invest. This easily perceivable logic is what drives the concept of a Market Portfolio . Most of all, it got Sharpe a Nobel
Firm Value
Another smart execution of a grade 6 concept called additivity
If i have to buy 4 kgs of rice , i should be charged the same whether or not i buy in bulk ( ideal scenario )
ie 4 = 2 + 2
If this is not the case, arbitrage will set in . Lets see how .
Lets say 3 kgs are given at Rs. 30 ( ie 10 /kg) but if i buy 1kg i have to pay Rs. 11/kg . A smart buyer will arbitrage by buying 3 kgs for Rs. 30 and selling 1 Kg packs for Rs.11 each, there by making Rs.3 on the transaction . Markets under equilibrium conditions shouldnt allow such things , hence 4 has to be 2 + 2 or
30 = 10 + 10 + 10 . Agreed ?
Now, lets link this to what Miller said,
D = Debt
E = Equity
Firm Value = FV
Miller said that FV = D + E and the firm value is independent of the capital structure.
We know,100 = 60 + 40
can 100 > 70 + 30 ? ( thats it we got the idea )
Just by changing the composition of debt and equity, if i can change the value of the firm, then the firm's only business would be to keep changing the debt- equity ratio and make arbitrage profit .
This cannot happen . Hence firm value is independent of capital structure .
Remember the concept assumes a frictionless world ( world without bankruptcy costs or differntial treatment of tax for Debt and Equity ,etc )
Now Miller got a Nobel prize for this.
Points to Pop
These ideas were noble because they were simple and hence won the Nobel .
Why noble ? Many economists later used these ideas and the wide spread use of them guaranteed the Nobel.
Moral of the story,Maximum impact can happen only when we keep things straight and simple. We can never influence people with complex things . Its simple things with deeper meaning that can take us places.
PS : This post is dedicated to my juniors who i had to disappoint by not posting a much more interesting , much awaited , game changing information ! Sincere Apologies !
Monday, July 20, 2009
Friday, July 10, 2009
Customer Insight
Many believe that a good product can help make big bucks in no time. Well it does, but not always. Most organizations ignore the importance of co-creating the product with a thorough insight on what the customer wants , how she would like to consume it and how different she expects a new service / product to be . The bottomline is the customers aren't probably looking at a new product even if it is very compelling . They are just looking for someone who could fill the gaps of the current product and maybe that is sufficient to stimulate a purchase decision.
Lets say i have a Jabab 150 STID bike and i love the power of the bike and the overall biking experience . I may love Jabab , but back in my mind, i know it would be great if someone offers me a similar power and biking experience along with a great mileage. Now, dont think aloud that Mileage and Power cant get married and if you do so , thats when you ignore the opportunity of giving the customer what she wants. If you do, you end up making a Jabab 180 STID which may be phenomenal and would have takers , but then you just gave them what you could offer and not what they want . May be a feature rich new model of Jabab 150 ABCD , which delivers what the customer wants, would have fetched you triple the sales and a proportional PAT and bonus.
Should you be happy with what you earned out of the new model or do you think deep about the missed opportunity . Infact product innovation without purpose can lead to a disaster. Reason, you took the customer for a ride !
A good example of giving what the customer needs rather than producing what you can is the way Dhainik Bhaskar launched their dailies in Jaipur,Chandigarh and Ahmedabad. Their goal was to launch as number two in all the places they launched and it is truly amazing how they actually surpassed their own goals .They were wanting to be leaders in vernacular medium while the margins are apparently higher in English dailies. I like to throw some key insights on their launches at the above mentioned places .
The Jaipur Launch
Goal : Launch a Hindi daily as a number 2 in Jaipur with a day 1 circulation of 50,000.
Result : Launched as number 1 with a day 1 circulation of 1,72,347 copies .
They overpowered the erstwhile leader's brand , built over 30 years , in a flash . What was the reason ? Yes , Passion is an obvious reason but the customer insight they developed through their market research was phenomenally brilliant. They not just met 2,00,000 households but made sure they paid repeat visits with inferences and information on both the research and the new product which made the customer feel special and most importantly the customer felt privileged when she could see what she suggested being implemented.
Remember, newspaper is a habit that someone builds over time and very difficult to change . Launching as number 1 in such an industry is quite an achievement.
The Chandigarh Launch
Goal : Launch a Hindi daily in a city where English paper circulation was 6 times the Hindi counterparts
Result : Launched as a number one newspaper with a circulation of 69000 on day 1 outclassing the top English paper by a whopping 28 %
How did that happen ? There was a belief by various newspapers that the residents of Chandigarh prefer English over Hindi and they were right too ! So how did Dhainik launch as number 1 ? They just dug deep and found out why English was preferred over Hindi and made sure those cosmetic requirements were met ,rather surpassed by their Hindi edition.
Now , you see what Customer Insight can mean to your brand . They not just conquered the existing market , they also expanded the market. Now , that is what you expect out of innovators and market leaders.
The Ahmedabad launch
Goal : Launch a Gujrati daily and obviously as number 1
Result : A world record with 4,52,000 copies on day 1
The reason i think they did well was they realised that the people in Ahmedabad prefer Gujrati over Hindi . Dhainik could have easily rolled out what they had , rather they chose to give the customers what they needed. This is Customer Intelligence ( not from technology point of view ) at its very best .
Now, why are such things not easy to emulate ?
The biggest problem with most Indian companies is the lack of emphasis on research . Research is considered to be an overhead , dead weight and a waste of time. How can you call a product innovative, if it comes out of little or no research and customer insight. If success is defined by how you feel about your product, then its okay, but not so for companies whose goals are revenue, value or number driven .
Remember , your product as an offering is what the customer perceives and not what you tangibly offer. If you feel you've done well to create a truly innovative masterpiece but your customers were never engaged throughout the product development, i suggest you hire a smart fin fella and ask him how to book your opportunity cost as losses in your P&L . You'd realise you probably not just missed a chance to triple your bonuses , but also committed a corporate crime by not delivering a superior value to your shareholders/ stakeholders.
To conclude , know your Customer , find what she wants and try to deliver the same and trust me you're sure not to be ousted by a smart thinker ( atleast overnight) . Your customer respects the fact that he is engaged and tends to become more loyal. Remember,the customer asset is also a bubble , just that she is more real and doesnt give you another chance to blow her to a fancier new bubble , unlike the stock markets
Lets say i have a Jabab 150 STID bike and i love the power of the bike and the overall biking experience . I may love Jabab , but back in my mind, i know it would be great if someone offers me a similar power and biking experience along with a great mileage. Now, dont think aloud that Mileage and Power cant get married and if you do so , thats when you ignore the opportunity of giving the customer what she wants. If you do, you end up making a Jabab 180 STID which may be phenomenal and would have takers , but then you just gave them what you could offer and not what they want . May be a feature rich new model of Jabab 150 ABCD , which delivers what the customer wants, would have fetched you triple the sales and a proportional PAT and bonus.
Should you be happy with what you earned out of the new model or do you think deep about the missed opportunity . Infact product innovation without purpose can lead to a disaster. Reason, you took the customer for a ride !
A good example of giving what the customer needs rather than producing what you can is the way Dhainik Bhaskar launched their dailies in Jaipur,Chandigarh and Ahmedabad. Their goal was to launch as number two in all the places they launched and it is truly amazing how they actually surpassed their own goals .They were wanting to be leaders in vernacular medium while the margins are apparently higher in English dailies. I like to throw some key insights on their launches at the above mentioned places .
The Jaipur Launch
Goal : Launch a Hindi daily as a number 2 in Jaipur with a day 1 circulation of 50,000.
Result : Launched as number 1 with a day 1 circulation of 1,72,347 copies .
They overpowered the erstwhile leader's brand , built over 30 years , in a flash . What was the reason ? Yes , Passion is an obvious reason but the customer insight they developed through their market research was phenomenally brilliant. They not just met 2,00,000 households but made sure they paid repeat visits with inferences and information on both the research and the new product which made the customer feel special and most importantly the customer felt privileged when she could see what she suggested being implemented.
Remember, newspaper is a habit that someone builds over time and very difficult to change . Launching as number 1 in such an industry is quite an achievement.
The Chandigarh Launch
Goal : Launch a Hindi daily in a city where English paper circulation was 6 times the Hindi counterparts
Result : Launched as a number one newspaper with a circulation of 69000 on day 1 outclassing the top English paper by a whopping 28 %
How did that happen ? There was a belief by various newspapers that the residents of Chandigarh prefer English over Hindi and they were right too ! So how did Dhainik launch as number 1 ? They just dug deep and found out why English was preferred over Hindi and made sure those cosmetic requirements were met ,rather surpassed by their Hindi edition.
Now , you see what Customer Insight can mean to your brand . They not just conquered the existing market , they also expanded the market. Now , that is what you expect out of innovators and market leaders.
The Ahmedabad launch
Goal : Launch a Gujrati daily and obviously as number 1
Result : A world record with 4,52,000 copies on day 1
The reason i think they did well was they realised that the people in Ahmedabad prefer Gujrati over Hindi . Dhainik could have easily rolled out what they had , rather they chose to give the customers what they needed. This is Customer Intelligence ( not from technology point of view ) at its very best .
Now, why are such things not easy to emulate ?
The biggest problem with most Indian companies is the lack of emphasis on research . Research is considered to be an overhead , dead weight and a waste of time. How can you call a product innovative, if it comes out of little or no research and customer insight. If success is defined by how you feel about your product, then its okay, but not so for companies whose goals are revenue, value or number driven .
Remember , your product as an offering is what the customer perceives and not what you tangibly offer. If you feel you've done well to create a truly innovative masterpiece but your customers were never engaged throughout the product development, i suggest you hire a smart fin fella and ask him how to book your opportunity cost as losses in your P&L . You'd realise you probably not just missed a chance to triple your bonuses , but also committed a corporate crime by not delivering a superior value to your shareholders/ stakeholders.
To conclude , know your Customer , find what she wants and try to deliver the same and trust me you're sure not to be ousted by a smart thinker ( atleast overnight) . Your customer respects the fact that he is engaged and tends to become more loyal. Remember,the customer asset is also a bubble , just that she is more real and doesnt give you another chance to blow her to a fancier new bubble , unlike the stock markets
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