Why consultancies exist?

In my opinion there are two fundamental reasons why management consulting (MC) firms exist:

1. Experience and expertise that an MC has in solving business problems: An MC has expertise in solving business problems which a business organisation often lacks. An MC can benefit from previous similar experiences and apply the learning to similar problems in fresh situations. e.g. a bank may not know how to enter a new market but an MC would most likely have assisted tens of other companies in a similar task. Thus, an MC offers value in terms of experience and expertise to that bank.
2. Presence of incentive incompatibility in business organizations: Every business decision faces business uncertainty and hence has some risk. Now an executive, who is just an agent of the shareholders (principals), will not take a risky decision unless he himself gets a return that satisfies his risk-return trade-off. In organisations such as investment banks this incentive incompatibility is low as the executives' bonuses are directly linked to the bank's profits. Hence, such IBs don't usually hire MCs unless it is for CDD (which is due to the reason explained in point 1). Now, MCs take a part of the risk and the return from the executive. Now, the executive's risk-return trade-off is satisfied and the MC's as well.
   

Materialism vs Idealism

What causes things to move or to act in the way they do?

A materialist believes that matter (things) shapes events. e.g. a materialist believes one will feel happier if one has a car, a house and a lot of money. So for a materialist, the source of happiness exists outside - in material things.

An idealist believes that ideas shape events. e.g. an idealist believes one will feel happier if one control his desires. So for a materialist, the source of happiness exists within oneself.

Who is right? I feel both are right to an extent.

In my past, I have certainly felt happier by possessing material things.
However, I have also felt happier after I controlled my desire to have an ice cream.

I believe that western philosophy is more Materialistic and Indian philosophy is more Idealistic. Americans extol material success. Whereas, Indians gurus focus more on self-control.

I believe this is due to different circumstances India and America have had historically.

India was a land of abundance in ancient times. Hence, matter was easily available and hence obtaining it was not really a virtuous task. So, self-control became a virtue.

In America, it was the opposite. Matter was not abundant explicitly. Hence, industrialists and businessmen had to extract matter by hard work and ideas. Hence, material success became desirable.

However, I believe we are more under the influence of materialism today than of idealism. We under-appreciate the power of mind.

A doubt... addressed

The question:

Before doing my MBA I used to ask myself two questions:

1. If a retailer only has 5% margin, why does he do the business?
2. Is he not better-off investing in stocks and making higher return?

The Aha!:

Now, after my MBA, I wonder how stupid I was!

Below is why the retailer should still be in the business:

First of all, we need to define his return on his investment (RoI). This can be defined as:

RoI = Income/Investment

Now, RoI can also be written as:

RoI = (Income/Sales) * (Sales/Assets) * (Assets/Investment)
= Margin * Asset Turnover * Leverage

[An MBA would instantly recognize that I am talking about the DuPont formula here].

Now, we can see that we are not comparing apples to apples when we compare 5% to 10% return on stocks - 5% is his margin, whereas 10% is his RoI.

Thus, his RoI should be = 5% * Asset Turnover * Leverage

Now, a big retailer can take loans and hence his leverage will be > 1. If he finances half of the assets through his own money and half through loans, then his leverage will be 2.

Now, if he sells all of his assets in 1 year, then he will make 10%!. Thus:

RoI = 5% * 1 * 2 = 10%

For unorganized retailers, leverage may not be possible that easily. Hence, these guys make money as follows:

1. Higher margins (15%-20%), as they mostly sell private-label stuff.
2. Understatement of income tax
3. High Asset turnover - by reducing their working capital needs (buying on credit, etc.)

Why is Oil rising?

Sources:
http://news.bbc.co.uk/2/hi/business/7048600.stm
http://en.wikipedia.org/wiki/OPEC
http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.htm
http://www.jubileeinitiative.org/RiggedOil$.html
http://www.reuters.com/article/reutersEdge/idUSL0132223020071101

1. Geopolitical factors:

These are causing uncertainty in the market and helping to push prices up. Such as fears about possible Turkey-Iraq conflict. This conflict could threaten oil output in wider region - Iran, Iraq, Kuwait and Saudi Arabia. These countries produce about 20% of world oil supply and about 50% of OPEC supply. OPEC accounts for 66% of the world's oil reserves, and about 40% of the world's oil production.


2. The weak $:

This makes it cheaper for importers to buy dollar-denominated oil supplies, thereby increasing demand for oil. Although biggest oil importers are countries that have had no benefit from a weaker $ - countries such as US, Japan and China. Still, the $ has gone down against currencies that control about 25% of the imports of top-15 oil importing countries

3. Growing demand from India and China:

India and China have about 15% share of the imports of the top-15 oil importers. Moreover, the oil demand from these countries is growing by double digits every year!


4. Financial speculation:

Investors take bets on future oil prices by oil futures. Earlier this year, these speculators were long on oil. As the price of oil has increased above $90, the investors that sold the options to these speculators are scrambling to cover their positions. This has boosted demand as well.

Thus, it is not just physical demand/supply but also financial demand/supply that influences the markets prices of oil.

FAQs

Below are some philosophical questions I often ask myself:

1. Is it all in the mind?
2. Is everything cyclic? If so, why?
3. Is there a trade-off between discipline and creativity?
4. Why do we improve after practice?
5. Is crime a fact of life?
6. Are there a few basic principles governing nature and life?
7. Is victory over self possible?
   
8. Why some people do not like some other without any reason?
9. Why some people don't like love movies like KKHH, DTPH?
10. Why is SRK either loved or hated?
    
11. Why is Jeans so popular?
12. Why some kids who show promise don't achieve their potential?
13. Why do opposites sexes attract? Why do homosexuals exist?
14. Why do some songs become so popular, while others do not?
15. Are there some basic principles that govern aesthetics?
16. Why do properly directed erotic movies arouse better than porn?
17. Why do I admire Ayn Rand?
18. Why do two people fall in love?
19. Why a lot of love marriages fail?
20. Are all claimed love marriages really so?

I will try to answer some of these in my future posts.

Indian financial system

What follows is my understanding of a May 2006 McKinsey report on Indian financial system reform:


This report asserts that Indian financial system is inefficient, and it does not allocate capital efficiently i.e. to its most productive uses.

Indian financial depth is low as compared to other Asian nations. This means that India has 160% of GDP as financial assets.

Breakup as a % of GDP as of 2004:

1. Equity: 56
2. Corporate debt (Through Bonds): 2
3. Govt debt: 34
4. Bank deposits: 68

This is as of 2004. Today (2007) the equity is about 100% of GDP. So financial depth has probably increased to about 200%. In comparison, Japan and Singapore have 400% financial depth.

Another aspect that is different about India is its low corporate debt. Hence, companies have to rely upon banks for loans.

Indians are also world's largest gold consumers and these money could be channelled into more productive uses.

Most of the savings go into govt priority projects. Banks are obliged to hold 25% of their assets in govt bonds. Govt policies require banks to direct a big chunk of loans to agriculture and other priority sectors.

Indian banks only lend out about 60% of their deposits. This number is about 100% for UK and US.

Much of the banks funds go to fund the total govt deficit (including states). This is about 12% of the GDP!

Indian corporate bond market is just 2% of GDP because of several reasons:

1. High issuance costs due to complex regulation
2. Lengthy listing procedures
3. High disclosure requirements
4. Inadequate credit risk rating system
5. Inadequate dispute resolution mechanisms.

Hence, these banks avoid the hassles. They go for pvt placement, international bonds or bank loans. These bank loans crowd out smaller players who need funds to grow. [May be this is why PE is booming in growth capital in India ].

If these inefficiencies are removed, India can grow even faster!!

Excellence

I often ask myself this question - what makes someone achieve excellence?

When I think of excellence I think of people like Pele, Bradman, Dhyan Chand, Ayn Rand, Ramanujam, Lata Mangeshkar, etc.

There are other great people too but I know the most about the above and hence want to keep only these in mind.

So did something make them or were they made of something?

I believe that the natural order of things intends us to follow a Normal distribution of performance. So, what makes certain human beings achieve the outcome that is only 0.00001% likely?

I guess there are three reasons:

1. Genes
2. Motivation
3. Practice
   

I believe genetic makeup can give someone an edge in performing certain tasks - e.g. someone may be born with very sweet or deep voice.

I also believe that motivation is what takes that person to excellence. These people simply are on a different level of consciousness. This may be circumstantial. This may be innate as well, because after a point excellence often is self-motivating. Whatever be the case, these people are able to stay motivated most of the times, and that causes all the difference.

Practice is essential for excellence. I think it wires our neural networks. The more we practice the more we get wired. Hence, the better our mental models become. Then in real life these mental models can handle randomness better.

Hence, to summarise I don't believe in a deterministic view of excellence. Anyone can become excellent, but one cannot force himself to become excellent. There is no direct bus that goes to excellence. One needs to take the right buses that progress towards excellence.

Cracking the Case!

Management consulting firms recruit by conducting case interviews. These interviews can be a nightmare for the unprepared candidate. Here are my two cents on how to do well in a case interview:

1. Get a working knowledge of frameworks such as: Porter's 5 Forces, 5 P's of marketing, BCG Matrix, Relative Market share, value chain analysis, segmentation, process maps, etc. Remember to keep the frameworks in mind while doing cases; but never apply a framework to a case unless it fits in to that case aptly.
   
2. Practice! I believe one should focus of quality of practice rather than on quantity. Hence, 7-12 cases should be enough to get good practice - provided you do these cases with people who have conducted case interviews before. Case interview is not a Puzzle interview where you must solve a tough puzzle on your own. It is a two-way process with elements of leadership, brainstorming, dialogue, structured thinking and crisp communication in it. Make sure you convey your capabilities in each of these areas!
3. While facing the interview be relaxed yet attentive. I believe this helps you to think better and quicker. Sometimes, if you are over-excited, even basic ideas and calculations can skip your mind and you can make stupid mistakes!
4. Connect with the interviewer. This is very important. Often a star candidate can get dinged if he does not connect well. On the other hand, if you are just above average but have good interpersonal skills, you may make it! Also, often interviewers drop cues during a case interview. Only an attentive person will be able to catch those cues. Therefore, look at your interviewer in the eye and try to log-in to his mind. This will certainly help you do well!
5. Verbalize! Always explain to your interviewer what you are doing before doing it. This helps the interviewer visualize what you are doing. This helps him evaluate you better. Remember, he is interested more in assessing how you think rather than in what you come up with.
   
6. Finally, smile! The interviewer will try to challenge you often. Never get stressed out in this situation. The key is to take each challenge with a smile. This will impress your interviewer and will also take the pressure off you.

Good Luck!

A year at INSEAD

This is my first post as a blogger. It is high time.

I must start with my experience at INSEAD. I started my 1-year MBA in January 2007, and now I am about to graduate. I have a dream job -with McKinsey - and I am so happy that I have not studied anything since past 2 weeks. This is unthinkable at INSEAD!

My first month at INSEAD was full of challenges. I was adjusting to the new place, people and information. Everything was new and challenging. In fact I noticed that in the first few weeks here was a healthy tension in the campus. There was a lot of sizing-each-other-up going on. All of us were facing some of the best brains from different cultures and were subconsciously placing them in our heads.

I have rarely slept less than 7 hours a day. I did at INSEAD - at least for the first 2 months. That was busy time as we also had to search for summer internships. Later on I got used to beating the system. Not all readings were supposed to be read. Team work meant: divide and conquer the assignments. Some of the early morning classes could be missed.

Nevertheless, I love the time that I have spent here. I have gained amazing information, perspectives and contacts at INSEAD. I am about to finish the program in December and then a new chapter will open. However, I will never forget the time that I have spent here at INSEAD!